By Lee Sang-jin
The Big Mac Index, devised in 1986 by The Economist, is a light-hearted way to compare real exchange rates among countries. Big Mac prices, in selected countries, serve to assess the value of the comparable baskets of goods in various currencies.
The burger index is surprisingly accurate in reflecting exchange rates adjusted for purchasing power parity (PPP). Applying this index to the Korean service sectors such as educational spending, we may identify the demand for and the competitiveness of such services.
The index encloses prices for restaurant leases, operating personnel, meat, bread, and so on. MacDonald’s restaurants are located in all major countries and the Big Mac production covers most of economic aspects; therefore, the index is recognized as an unwavering tool for economic judgment.
The 2011 Big Mac Index shows Korean won is undervalued by 14 percent (the raw Big Mac Index) but overvalued against the dollar by 21 percent (the new Big Mac Index) when adjusted for per capita GDP.
PPPs are preferable to exchange rates for converting national expenditure data into a common currency because they also adjust for the difference in price levels between the two countries. The Big Mac Index or PPP is based on the law of one price for each product across borders.
However, PPP applies to tradable goods that are exchanged across borders, like handsets and clothes. Non tradable items such as education, medical care, and housing cannot be purchased in foreign countries even though those may be much cheaper in Korea in terms of the Big Mac Index.
The raw Big Mac Index has typically been a vehicle for the U.S. Congress to press the Chinese government to ease control of yuan exchange rates, which is pegged and undervalued by 44 percent against the dollar in the 2011 index. This index has provided a few tips for investors in foreign exchange.
Rather, the index can be used as a benchmark on whether those services are abnormally in great demand as shown in an expenditure on private educational enterprises or are relatively higher in quality than other countries as in medical care services.
The PPP-based Big Mac price for Korean educational expenditure per household is probably much higher than that of the U.S., France, or the U.K. Koreans’ medical expenses in treatment and care are believed to be quite low given the quality of service.
Many Koreans contemplate the overheated or distorted education industry because private tutoring institutions are booming but public schools are losing the pertinence and practical bearings on student needs.
In contrast, U.S. President Barack Obama praised the Korean education system in adopting longer school days and more hours a day at school. His remark may be misleading the nature of the Korean educational front.
To validate one’s argument over the competitiveness of a certain sector, one needs to attach relevant figures on the items under review. This argument frequently ended up with an assertion in the past, failing to bring the pertinent data.
Besides using the index for measuring the competitiveness or the degree of problems, the concept of the index can work to develop a more dedicated and particular benchmark in place of generic indicators.
The latte index and the lipstick index were proposed as alternative currency benchmarks to the Big Mac Index. In a similar way, we may find out a specific PPP index tailored to a designated service sector.
Lee Sang-jin is director general at the Industry Policy Bureau of the Prime Minister’s Office. He is in charge of policies for industry in general, small- and medium-sized enterprise, intellectual property right and broadcasting & telecommunications.