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Latin Big Mac: Still Expensive

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It's still more expensive to have a Big Mac — and to compete — in Latin America.

BY CLAUDIO LOSER
Latin America Advisor 

WASHINGTON, DC — By now readers of this column may think that I have a vested interest in the McDonald's Corporation or in The Economist magazine, publisher of the Big Mac index since 1988. In fact, I do not have any direct financial interest in either of them beyond the very small portion that could be in my very broad-based pension plan. However, my attraction toward the Big Mac exchange rate index (just issued for 2008) is its ability to capture in a universal and simple fashion changes in relative purchasing power among countries. It has serious shortcomings, as it follows only one specific product, but it captures very well major changes in prices and exchange rates.

The graph (...) describes the behavior of the Big Mac index for Argentina, Brazil, Chile and Mexico and other major players in the world. It also incorporates a general index for Latin America and includes nine countries in more recent years. The chart is built in comparison to a weighted average for the different countries and regions in the group. It has a common value of 100 for all in 2003, so that it shows the relative changes with respect to the average, rather than the difference in cost. Thus, an increase indicates an appreciation of the local currency (Big Macs become relatively more expensive), and a decline suggests a depreciation.

ADVANTAGE LOST

The chart shows the sharp depreciation observed for Latin America from 1998 to 2003, particularly for Brazil and Argentina. By now this competitive advantage has been lost, either through an appreciation of the currency (Brazil), or through inflation (Argentina, without manipulation by the government's statistical office). Mexico and Chile show some depreciation, although most of the region lost ground with respect to the US, China and Japan, three trading giants. More comprehensive measurements show equivalent results, suggesting that the region, while benefitting from favorable conditions, is now exposed to greater risks. In particular, commodity prices and world economic growth are receding. This provides a stern warning in terms of exporting capacity, especially for those that have appreciated the most (Brazil, Colombia, Chile), or had less progress on inflation (Argentina, Venezuela, Uruguay).

Of course, it still is more expensive to have a Big Mac in the US than in Chile, Costa Rica, Mexico, Peru and Uruguay, and about even in Argentina. But go to Colombia, Venezuela, and particularly Brazil, and you are in for an expensive surprise. For a really cheap burger, go to Japan, or China where the price is about one half as high as in the US. Next time we will need to broaden the test and look also for a cup of coffee, preferably at another prominent chain.

Claudio Loser is a Senior Fellow at the Inter-American Dialogue and former Head of the Western Hemisphere Department at the International Monetary Fund. Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

 

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