Purchasing Power
Purchasing Power Parity (PPP) is a neoclassic economic idea which states the currency exchange rate between two countries should equalize the price differentials charged for an identical basket of goods in each country.
This is a fancy way of saying if an object costs $1 in the United States and a USD/JPY exchange rate is 1:150, then the same object should cost Y150 in Japan.
When these theoretical values aligns in the real world, it suggests each market is able to run at an equal productivity level and enjoy a free flowing, frictionless ecosystem where everyone has equal access to raw inputs for production.
When the prices do not align as expected, it suggests one market is at a less productive level or some factor is interfering with pure market pricing. Too much rent seeking behavior, taxes, sanctions or supply chain bottlenecks to name a few possible drags.
The Big Mac Index
The Economist has published the Big Mac Index since 1986 as a way to informally gauge purchasing power parity for food across the world. Though it started as a tongue-in-cheek metric, due to the number of ingredients in a Big Mac, the corporate supply chain underpinning it and the ubiquity of McDonald’s locations in the developed world, a Big Mac serves as a surprisingly accurate proxy for purchasing power and relative inflation levels between countries. The index also gave rise to the word burgernomics. So there’s that.
The Happy Meal Index
I’m proposing The Economist should start publishing a similar Index called the "Happy Meal” index. The Happy Meal Index would help visualize the cost of feeding a child in any given country or region. The higher the cost, the higher the strain of raising children is for an average family. Plus you get a cool toy for a Disney movie coming out soon!
I’ve recently discovered there are now $12 Adult Happy Meals for people who want a cheap toy but also feel a need for 1500 calories in their lunch. Somewhere in a Brooklyn McDonald’s, a 27 year old man-child is throwing a tantrum over them being out of Inside Out 2 characters
Over the longer run, tracking costs of feeding a child has strong predictive powers for GDP growth, helps estimate future changes in the birth rate, generational population fluctuations and work force participation figures both now and down the road.
Why Track the Cost of Feeding a Child
Kids ain’t cheap! According to USDA data and inflation statistics from the BLS, raising a child in 2023 could cost an average of $331,933 from the time a child is born to age 18. At the low end of most estimates, a U.S. family of four spends about $11,700 per year on food at home with each child costing about $2000-$2500 per year.
Using the Big Mac Index and the Happy Meal Index together, people would get a more wholistic snapshot of the marginal food costs for a family. If you buy a Big Mac for yourself, it’d cost a certain amount but if you brought your 2 kids along with you and bought them each a Happy Meal, how much more would it really cost you?
How much relative to a year ago? Relative to 5 years ago? What if you were in Britain? Or Brazil? Or Japan? The duo indices would help answer these ponderings and help highlight what type of families are most impacted by rising food costs.
Interested in being on the Trader Dads Podcast in 2024? Shoot me an email! I’d love to have subscribers on to sit for a discussion
TRADERDADS MAILBAG
Thoughts? Questions? Comments?
Reach out! Maybe I’ll do a full post on the topic or as a Q&A
traderdads@substack.com