Reinterpretation of Big Mac Index in accordance to PPP.

Created by The Economist in 1986, the Big Mac Index has been used as a simple and effective way to compare the purchasing power of different currencies around the world. The Big Mac Index is calculated by comparing the price of a Big Mac, a product that is sold in the same form almost everywhere. While it provides useful insight into how currencies differ in value, it is based on a very basic product - fast food. However, as spending habits around the world shift toward experience-driven, premium services and branded products, the need for new ways to measure purchasing power is growing. Introducing the modern Starbucks Index, which takes into account how much people around the world are paying for global experiences, not just products. In this article, we'll explore how the Starbucks Index more appropriately measures global purchasing power in today's economy and why incorporating purchasing power parity (PPP) can provide more insight.

The Big Mac Index works because the Big Mac is the same almost everywhere. But much of today's consumption is centered around experiences and premium brands. Starbucks is a perfect example of this shift. The price of a Starbucks drink, especially a Starbucks Reserve or seasonal latte, represents a value that goes beyond the beverage. For many people, Starbucks is not just about the coffee, it's about the experience - the brand, the atmosphere, the lifestyle. Starbucks is more than just a place to work, a place to meet friends, a place to enjoy a moment of luxury.

Given these shifts in consumer habits, the Starbucks Index can provide a more modern view of global purchasing power. Instead of focusing on a single food item, like a Big Mac, the Starbucks Index measures the price of premium products (like a tall latte) in each country and adjusts for local economic conditions. This allows us to provide a more in-depth and nuanced view of how much people in different countries are actually paying for premium global experiences.

The Starbucks Index tracks the price of a tall latte or other similar beverage by country. Because Starbucks operates with relatively consistent prices in many markets, it's easy to compare prices for standard products around the world. But what makes this index different is that it adjusts for purchasing power parity (PPP) to account for differences in local income levels and cost of living.

Here's why PPP matters: Let's say a tall latte costs $5 in the US and 350 rupees in India. On the surface, it looks like the drink is cheaper in India. But that doesn't take into account that the average wage in India is much lower than in the U.S. So while the nominal price is lower in India, the actual cost (as a percentage of income) may be higher. PPP helps to adjust for these differences. It allows you to consider whether a Starbucks drink is really cheap, and how much of that money goes back into people's incomes and local economies.

Purchasing power parity (PPP) is the theory that the same goods should cost the same in different countries once exchange rates and the local cost of living are taken into account. In reality, prices vary because wages, local production costs, and supply chains differ around the world. It's PPP that adjusts for these differences to help you compare the true cost of goods and services between countries.

To apply PPP to the Starbucks Index, we look at the price of a Starbucks beverage in each country, and then adjust the price based on the local cost of living and average income. For example, even if a tall latte costs 350 rupees in India, the perceived price will be different for someone earning 20,000 rupees per month in India than for someone earning 3,000 rupees per month in the United States. The American worker might spend only a fraction of their income on a cup of coffee, while the Indian worker might spend a much higher percentage. This gives us a better idea of whether Starbucks is “expensive” or “affordable” based not just on nominal prices, but on what people can actually afford given their income and local economic conditions. For example, a tall latte costs $5.00 in the U.S. and 350 rupees (about $4.70) in India. Average monthly income: $3,000 for US workers and 20,000 rupees (about $250) for Indian workers.

Looking at the nominal price alone, Starbucks appears to be cheaper in India. However, when adjusted for local wages, an Indian worker needs to spend 1.4% of their income on a cup of coffee, while a US worker only needs to spend 0.17%. This is a lower nominal price, but when you consider PPP, you can see that Starbucks is not cheaper in India than in the US.

Adjusting the Starbucks Index for PPP can tell us a lot about local economies and global consumer trends.

1. Economic disparities: The index can also highlight economic disparities between countries. While a Starbucks may be an everyday purchase in a wealthy country, it may be considered a luxury in a low-income country. This index shows that even a global brand like Starbucks is perceived differently in different countries.

2. Branding and pricing strategy: For companies like Starbucks, it's important to understand what consumers in different markets can afford. The Starbucks Index helps companies understand whether they are pricing their products in a way that matches local purchasing power and whether they need to adjust their prices to be more competitive and accessible.

3. Consumer behavior: Finally, the index helps you understand how global consumer behavior is changing. As more people in emerging markets join the middle class, demand for premium brands like Starbucks is growing. The Starbucks Index can track how this change is affecting the affordability of these products globally.

While the Big Mac Index is still a useful tool for comparing global economic conditions, it no longer fully reflects the way people spend today. By focusing on premium, experience-driven products and using purchasing power parity (PPP) to adjust for local economic conditions, the Starbucks Index provides a more relevant and modern way to measure global purchasing power. It shows how much people in each country are actually paying for global brands, lifestyles, and premium experiences, not just products. By adjusting for PPP, the Starbucks Index can provide a clearer and more accurate picture of the true price of these global experiences, giving businesses, policymakers, and consumers valuable insights into the ever-changing global economy.