# Tag: PPS exchange rates

## Big Mac wages

At least once a year The Economist publishes its ‘hamburger standard’ exchange rates for currencies. It is a light-hearted attempt to see if currencies are exchanging at their purchasing-power parity rates. The test is the price at which a ‘Big Mac’ McDonald’s hamburger sells in different countries!

According to this simplified version of the purchasing-power parity theory, exchange rates should adjust so that a Big Mac costs the same in dollars everywhere (see Economics 8th edition Box 25.4).

These Big Mac exchange rates can be used to compare various prices and incomes between countries. The article linked below from The Guardian compares minimum wages between European countries in Big Mac terms.

There are 25 countries across Europe which have minimum wages. A clear pattern of minimum wage rates can be seen: although actual exchange rates understate the purchasing power of incomes in poorer European countries compared to richer ones, minimum wages, even in purchasing-power standard terms, are still higher in the richer countries.

Luxembourg’s minimum wage buys you just about three Big Macs in an hour, while most of northern Europe (and France) between 2–2.5 Big Macs. Moving south, the minimum wage nets about one Big Mac an hour. As we progress east, it begins to cost more than an hour of work on the minimum wage in order to afford a Big Mac.

Of course, there are other factors determining the dollar price of a Big Mac other than the failure of exchange rates to reflect purchasing-power parities. Nevertheless, using the Big Mac index in this way does give a useful preliminary snap shot of differences in what minimum wages can buy in different countries.

### Articles

Comparing the minimum wage across Europe using the price of a Big Mac The Guardian datablog, Alberto Nardelli (25/9/14)
Minimum wage statistics Eurostat (Sept/14)

### Data

Earnings Database Eurostat

### Questions

1. What is meant by ‘purchasing-power parity exchange rates’?
2. Why may actual exchange rates not accurately reflect the purchasing power of currencies within countries?
3. Using the link to Eurostat article above, compare Big Mac minimum wages with (a) actual minimum wages and (b) minimum wages expressed in purchasing-power standard terms.
4. Using the links to the Eurostat article and Eurostat data, describe how the proportion of employees earning minimum wages varies across European countries. What factors determine this proportion?
5. Using the same links, describe how the monthly minimum wage as a proportion of average monthly earnings varies across European countries. Explain these differences.

## Living standards – overtaking the USA in the slow lane?

In the 1990s UK living standards were estimated to be 4% below those of the USA, 33% less than in Germany and 26% lower than those in France. However, faster economic growth in the past two decades has, according to Oxford Economics, led to average incomes overtaking those in the USA and rising some 8% more than those of France and Germany.

UK living standards outstrip US Times Online (6/1/08)
…but at least we’ve got one up on the Yanks Guardian (6/1/08)

### Questions

 1 Explain the difference that the value of sterling makes to the measure of the standard of living. 2 “With an adjustment made for this “purchasing power parity”, the average American has more spending power than his UK counterpart and pays lower taxes”. Define what is meant by purchasing power parity (PPP). Why does the standard of living need to be measured at PPS rates? 3 Discuss the principal factors that have led to the increase in the standard of living in the UK.