Mac-roeconomic indicators

This month is the 25th anniversary of The Economist’s Big Mac index of purchasing power.  Formal Purchasing Power Parity indices measure the cost of a basket of goods, but The Economist’s theory was that a single product, the ubiquitous Big Mac might give equally informative results.  Looking at the Big Mac index in conjunction with GDP per head to account for income disparities, should therefore indicate which currencies were overvalued.

For years this was the Icelandic krona, until it lost half its value between end Dec 2007 and end Dec 2008.  The index used to suggest that the Chinese yuan was overvalued, but now reckons the valuation to be about right.   However, the current index suggests the Brazilian real is overvalued. http://econ.st/pVSOSg. Food for thought.  Sorry.  Not as bad as the mac-roeconomic pun above though.

I wonder how long the Big Mac might be an effective single product for such an index however – you need something which is pervasive, not likely to go out of fashion, and not heavily influenced by other factors.  Water shortages or other environmental concerns (raising beef is very costly in terms of natural resources), and health policies (taxes on fast food) could conceivably raise the price of a Big Mac significantly and variably in different countries.

What might be the alternatives?  A Starbucks index has been mooted.  But is coffee consumption responsive enough?  Takeaway coffee appears to be peculiarly resilient to economic downturns.  We’ve all noticed energy bills creeping (shooting?) up but who’d have thought that Britons spend more on coffee than on their annual electricity bill?  Research published last month showed that a consumer who spends an average amount on drinks from coffee shops spends just over £450 compared to the typical £424 household electricity bill.  http://bit.ly/ogzRnj

Google searches might be a more fruitful source of real time economic indicators, and are readily accessible – searches on “gold” and “estate agents” would reflect consumer confidence.  The latter search is apparently monitored by the Bank of England to predict changes in the housing market, a famous leading indicator of economic conditions.

If anyone has any ideas, I (and The Economist) would love to hear them

Comments
John Stokdyk's picture

Analysis of Twitter mood

John Stokdyk | | Permalink

Interesting blog, Louise. Strangely, I was just listening to an academic on Radio 4's Today programme explain how his team was able to use algorithyms that analysed Twitter traffic to predict the public mood - and behaviour of the stock market.

2-3 days after the software spotted upturns in mood, share prices would go up. Apparently a company that now uses the program achieved 1.5%+ growth in July.

It's not 1 April, so I don't think it's a joke, but I haven't been able to find more comprehensive references. I'll report back if I do.

listerramjet's picture

25 years! where does the time go?

listerramjet | | Permalink

apart from wondering how many big macs have been consumed in those 25 years, what does strike me is, WOW what a brand - 25 years and it is still as relevant.

louise ross's picture

More detail on Twitter would be interesting, thanks

louise ross | | Permalink

Well some pretty unusual indicators have become quite widespread – including hemlines (rising women’s hemlines suggest a rising economy, suggested economist in 1920s), lipstick sales (when consumer confidence is low, women buy moderate luxuries like lipsticks rather than expensive handbags or shoes) and underpants sales (men delay replacing worn out undies until they believe a recession is safely over).

But the Twitter one is interesting.  Is there an infectious collective mood which is first recognised in upbeat tweets then materialises in optimistic traders?  Suspicion that much of the activity in financial markets is not as expert/rational as we’d all believed..

louise ross's picture

A bit of flex makes a brand last

louise ross | | Permalink

Maybe it’s the quality of an enduring brand that it’s sufficiently robust to be recognised by everyone, but will occasionally adapt to local conditions or for special promotions.  Look on Wikipedia’s page for Big Mac and for Coke to see what different varieties have been produced - some markets like fruit flavoured Cokes; there are Kosher Big Macs, Maharaja Macs made with chicken, and French Big Macs with wholemeal buns.

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Louise Ross lives and breathes management accounting, as she is both a CIMA member and employed as a technical specialist by CIMA.  She sincerely believes management accounting to be 'the interesting bit' of accounting.  Granted, her experience of other areas is limited to a few years in the lower reaches of public sector audit - two decades ago!