Purchasing Power Decline (in Big Macs)

I was reading an article on zerohedge, Big Mac Index suggests America in decade-long depression, about a decline in GDP when it is adjusted for the price of a McDonald’s Big Mac. The article showed a net decline in GDP from 2007 to 2017. An obvious thought occurred to me: what about per capita GDP? So, I looked up the population statistics and plugged them in.

Here is the result:

Year Nominal GDP Big Mac Price Adjusted GDP Per Capita GDP
Trillions US $ US $ Trillions BM BM
1987 4.9 1.60 3.06 12,629
1997 8.6 2.42 3.55 13,023
2007 14.5 3.41 4.25 14,092
2017 19.4 5.06 3.83 11,759

I don’t think GDP is a very good measure of economic output, even when it has been adjusted for inflation. Unfortunately, there is no good measure of economic output, nor is there an ideal way of adjusting for inflation. Keeping that in mind, it’s still interesting to look at inflation-adjusted per capita GDP as a rough indicator of prosperity.

The Big Mac method of adjusting for inflation is pretty good, at least within a single country, because a Big Mac is a standard product that is very widely consumed, and one that has many inputs to production. Those inputs include more than just the ingredients. They include building and maintaining stores and equipment, electricity and other forms of energy, transportation, real estate, labor and many others.

There are good reasons to believe that the official measure of inflation (CPI) underestimates inflation. The CPI involves a lot of assumptions, and that makes it difficult to understand. The Big Mac adjusted GDP is something that you can sink your teeth into.

If anything, the Big Mac adjustment might be underestimating the real impact of price increases. The costs of housing, healthcare and education have risen faster than the price of a Big Mac.

In my opinion, the high level of per capita GDP in 2007 was due to the financial bubble that peaked around that time, and did not reflect actual prosperity. It was an illusion, to put it simply. I suspect that real purchasing power has been declining since the late 1990s or early 2000s, but the decline was hidden by the housing and stock market bubbles, and by our definition of GDP. However, I can’t back up that speculation with hard data, at the moment. (I probably could, with some time and effort.)

Western societies are still prosperous by historical standards. But things are slowly getting worse, and people are starting to notice. The cultural expectation of material progress seems to be fading away.