Ecoinometrics - Revisiting the Big Sats Index

How many burgers can you eat for your sats?

The Big Mac Index by The Economist tracks the price of a Big Mac in different countries around the world. It is one tool among others which allows you to examine absolute and relative purchasing power trends in local economies. 

After one year of high inflation what is this index telling us about what's going on in the global economy? And what is its cousin the Big Sats index telling us about Bitcoin?

Since there isn’t much new to talk about before the conclusion of the FOMC meeting lets have some fun with this data set.

---

The Ecoinometrics newsletter helps you navigate the landscape of digital assets and macroeconomics with investment strategies backed by data. Subscribe now to get the latest research directly in your inbox.

Done? Thanks! That’s great! Now let’s dive in.

---

Revisiting the Big Sats Index

Take an item available internationally, track its price in different countries and compare  the ratio of those prices as a way of gauging the relative strength of different economies.

In theory that makes sense. In practice it isn't so straightforward. 

You need to find an object that is the same everywhere in the world and that is common enough so as to give us useful information about the local economy. 

As an example the iPhone is virtually the same everywhere it is sold in the world. But the fact this is an expensive item means it might not qualify as a relevant item in the developing world. Not to forget the fact that you might not even be able to get your hands on an iPhone in some country.

So you need to choose an item that's cheap enough to be relatively affordable around the globe. And of course you want it to be available in most countries.

That's how we end up with the Big Mac. MacDonald has operations in a wide variety of countries. The Big Mac is always on the menu. That's exactly what we need... Until you look at it closer. 

The main issue I'd point is that the Big Mac is far from being the same in every country. Its size, ingredients and mode of preparation can vary widely. Which means we aren't comparing like for like most of the time.

Even staying in the same country. Looking at the evolution of the price of a Big Mac over time doesn't necessarily tell you all you want to know about inflation. The reason for that is the phenomenon of shrinkflation. In order to not drastically increase the price of  an item to keep up with its cost of production you just make it smaller. Keep the same name and voila. If you look at pictures of the Big Mac then and now it is pretty clear that shrinkflation has been at play.

I'm just prefacing this analysis with that to make it clear that insights you get from studying the Big Mac index compiled by The Economist are subject to some caveats:

• Inflation is likely to be underestimated.

• Relative inflation between countries only makes sense if you look at long periods of time.

• Only a kernel of countries where the Big Mac is routinely consumed can probably be compared to derive some robust analysis.

Tl;dr you shouldn't read too far into what the data is saying.