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Burgernomics 101 What the Big Mac can tell us about the year ahead

you’ll likely have heard sto- ries about how bad the world economy is. Interest rate hikes in the US. Rock-bottom com- modity prices here at home. Fears of Britain’s “brexit” from the Eurozone, Russian aggres- sion, ISIS and the collapse of OPEC’s oil cartel. My oh my – what next? What is the aver- age person to do? And most important, how can anyone make sense of all this? This month, I’ll suggest a


way to understand what’s go- ing on in a way we can all relate to, whether it’s because we’ve run out of time to cook dinner, or because we need something greasy to keep all that alcohol down. So when it comes to “Streetnomics” (you know, the kind of ideas you learn in the real world on the street, as opposed to the ab- stract stuff we’re taught in university), what the people want is a way to measure their ability to buy stuff, both now and tomorrow, given how much cash they make every two weeks. And how better a way to explain it then by using a tasty example of two all- beef patties, special sauce, lettuce, cheese, pickles, onions – all on a fresh sesame seed bun? Friends, I’m talking about the most useful measure of economics we finance nerds have: Te Economists’ Big Mac Index! Right now you’re probably asking,

016 is here and off to a roller coaster start! If you’ve watched the news or listened to any podcasts as of late,

ing whether a country’s currency is over- valued or under-valued compared to the American dollar. The Economists’ Big Mac

Be the Change Michael Silicz

Index has been measuring the cost of a Big Mac in American dollars since 1986. Here’s how it works. Te index is based on the theory of purchase power parity, or PPP, which measures the values of currency bench- marked against a standard cur- rency (in this case, the global reserve currency of United States dollars). It also is a way of measuring how much a Big Mac has increased in price over time (hint – they cost more today than they did yesterday). In English, PPP assumes that

the exchange rate adjusts so that an identical good in two

different countries has the same price when expressed in the same currency. For exam- ple, a McDonald`s cheeseburger that sells for CDN $1.50 in Winnipeg should cost US $1.00 in a U.S. city when the exchange rate between Canada and the U.S. is exactly 1.50 USD/CDN. (In this example, both cheese- burgers cost US $1.00.) Concisely, that`s what the Big Mac Index is – it measures the cost of an American Big Mac relative to Big Macs elsewhere in the country’s local currency. Te Economist just released its latest 2016

“whoa Mike, your bio suggests you’re a bright fella, but come on… you need to have a break today because you’re talking nonsense!” Despite what you may think, the Big Mac Index is a peer-reviewed and well-established everyday way of explain-


ACROSS 1. "The results ___ (election- night report) 6. Rainy day footwear 14. Jittery

15. Desirable canine trait 17. Running tracks 18. Like some business buy- outs

19. Roundworms 21. Singular

22. Honda model 23. Notifies

25. Come together 26. Tiny particle 28. Grassy borders 29. IV sites 30. Horse feet 32. Child expert LeShan 33. Gamblers 34. Big deal 37. Movie house guides 38. With "t," a clump of grass 41. "Sling Blade" actor Robert 43. Den 45. Naked, in Nantes 46. Pep 47. Team heads 49. Part of a packaged foods giant

50. Sort that's reluctant to spend

52. "No, No, Nanette" number 55. Aunt, to Simone 56. Reunion question 57. Bernese Alps peak 58. Ones who are frequently online

59. Prepare for dining out DOWN

1. Simultaneously 2. Bacchus, notably 3. Glossy paints 4. Imam's religion 5. Snapple rival

February 2016

6. Mouth bling 7. Busy as ____

8. Bulgarian cash units 9. "___ to Joy" 10. Gentleman 11. Doctor 12. Swallow greedily 13. Like perfume or some candles 16. Early capital of Macedonia 20. Furtively 23. Antipathy

24. More, in a phrase 27. Roadside inn 31. Insatiable 33. Rom. neighbor

Answers on next page Smart Biz 13

34. Agee's "___ in the Family" 35. Oubliette 36. Intimidate 38. Shake up 39. Former MTV personality Daisy 40. Sample bottles 42. Fatah co-founder 44. Traveled like Huck Finn 48. Mrs. Cliff Huxtable 50. Eye woe 51. Tae ___ do 53. "Either you say it ___ will!" 54. Native American land, casu- ally

measurements in early January. For our purposes in Canada, an American Big Mac in US dollars cost $4.93. Yet were you to con- vert an American dollar to Canadian dollars to buy the same Big Mac, it would only cost $4.14 USD! Despite an actual exchange rate of about $1.41 USD to $1 Canadian dollar, the Big Mac Index implies an exchange rate of $1.18. Te bottom line is that the Big

Burgernomics: The Economist simplified the clutter of economics with the Big Mac index. Photo courtesy of McDonald's.

Mac Index shows that the Canadian dollar is undervalued by about 16% compared to the US dollar. So, what does this tell us about Canada

today? Well, not since the South Osborne McDonald’s location resurrected the 2 cheeseburger meal has there been such a joyful reason to celebrate – our dollar, based on the Big Mac index, is vastly undervalued compared to the US dollar. What this sug- gest is that our Canadian dollar should, over time, become stronger versus the American dollar, implying that we will soon be able to order stuff from and ship it home cheaper than through with its higher prices. Tis is a great thing for Canadian consumers, and especially for

those of us who like to supersize our meals. Brilliant in its simplicity, the Big Mac

Index helps us understand the world in terms of lunch. In burgernomic terms, our Canadian dollar should be able to buy more Big Mac than it currently does, meaning that over the long term, our dollar should grow stronger against the American one. Hopefully, by the time the Shamrock Shake returns, we will be closer to Big Mac parity. What’s not to love about that? Michael Silicz helps people separate the

signal from the noise. He has experience in finance, law and public policy. If you have any column ideas or would like to see Mi- chael write about a specific topic, email him at

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