Comparing Price Levels Is Hard: The Big Mac Problem (Price Indices #2) Transcript

Transcript (PDF)

Big Macs!! Costs $2.66 in Vietnam but $5.06 in the US. That’s 90% more.[1]

If the Big Mac were perfectly comparable across countries and the only product, then comparing price levels across countries would be easy. We could simply say that the US is 90% more expensive than Vietnam.

But we can’t. Because the Big Mac isn’t perfectly comparable across countries. And it certainly isn’t the only product. Comparing price levels across countries is hard.

In this video, we’ll look at the problem of comparability, AKA the Big Mac Problem.

To compare price levels, the basic idea is simple: Take similar products and compare their prices. So, moped with moped. Toyota with Toyota. Fighter jet with fighter jet. But not bicycle with yacht.

Now, what about the Vietnam Big Mac? What US product should we compare it to? Obviously the US Big Mac, right? Wrong.

In Vietnam, McDonald’s equals American dream. It’s for yuppies and hipsters. It’s where you celebrate birthdays and promotions. $2.66 for a Big Mac doesn’t sound like much. But it’s crazy in a country where a bowl of phở is less than a dollar[2] and the minimum monthly wage is $166 — or less.[3]

In the US, McDonald’s is the pits. It’s for losers and misers. It’s where you watch free fights and drama.

The US Big Mac is low-end. The Vietnam Big Mac is upscale. They are neither similar nor comparable.

The problem of comparability is this: Figure out, for each product, what the appropriate comparison is. I also call this the Big Mac Problem, as a counterpoint to The Economist magazine’s[4] Big Mac Index.

The Big Mac Index is a light-hearted measure for comparing prices and currencies across countries. It is based on a single product — the Big Mac. The Big Mac was chosen because it was just about the most ubiquitous, standardized, and comparable product The Economist could think of.

But as we’ve just seen, even the Big Mac runs into the Big Mac Problem. Even the Big Mac isn’t perfectly-comparable across all countries.

And the Problem only gets tougher when we look at other products. One reason is that quality can vary across countries. Should we compare a train journey in Japan and India? A year of school in Japan and India? A doctor’s visit in Japan and India? And if not, what are the appropriate comparisons?

Worse still, a product commonly consumed in one country may not exist in another. Dog meat — common in Vietnam, but what US product should it be compared to? Liposuction — a popular procedure in the US, but what’s the Ethiopian comparison? Alcohol — quaffed in Russia, but what’s the Saudi comparison? Durians — king of fruit in Southeast Asia, but what’s the British comparison?

Comparing price levels across countries is hard. In this video, we looked at the problem of comparability, AKA the Big Mac Problem. In the next video, we’ll look at another problem called substitution bias.

Footnotes

[1] According to The Economist’s Big Mac Index (Jan 2017 update – spreadsheet, webpage), a Big Mac costs 60,000 VND ($2.66) in Vietnam and $5.06 in the US.

[2] According to VietnamOnline.com (retrieved Feb 2017), a bowl of  phở “costs about 20,000 in local place”. That’s one-third the cost of a Big Mac (60,000 VND according to The Economist).

[3] The minimum monthly wage varies by region. Region I: 3.75M VND ($166), Region II: 3.32M VND ($147), Region III: 2.9M VND ($128), Region IV: 2.58M ($114). See Decree 153/2016/ND-CP (originalPDF backup, English translationPDF backup).

[4] Yea yea, I know. The Economist likes to call itself a “newspaper”.

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