What Big Macs and the Bronx Can Tell us About Borders

A working paper by Anthony Landry of the Federal Reserve Bank of Dallas takes a new look at the Economist's famous Big Mac Index, a ranking of countries by purchasing-power parity based on the local price of a McDonald's Big Mac -- an ideal point of comparison as the Big Mac is generally made the same way with the same ingredients in every country. 

But Landry noticed a useful wrinkle in the data: Unlike other countries, the U.S. price published byThe Economistnewspaper is an average of four city prices Atlanta, Chicago, New York City, and San Francisco. In turn, the New YorkCity price is an average of three borough: : the Bronx, Manhattan, and Queens.

Why does this matter? Well, as it turns out, cross international borders can have less of an impact on the price of your burger than crossing Grand Concourse:

I show that The Economist newspaper data are representative by conduct-ing my own survey of Big Mac prices across forty locations in New York City. The survey reveals a large price disparities across neighboring locations. For example, the standard deviation in Manhattan is $0.20 over an average dis-tance of 2.6 miles from Penn Station. Large price disparities observed in the cross-section should not be a surprise for anybody. Wages, rents and othernon-tradable factors that ináuence production costs vary signifcantly acrosslocations. Thus, observing the sale of identical goods at different prices indiffrent countries does not tell us much about border frictions because pricesvary substantially across locations of the same neighborhood.

Big Mac real exchange rates are far more volatile between countries than they are across the United States. Big Mac prices also show us, however, that the bulk ofthe time-series volatility observed across the United States arises within a city. For example, I find that 75 percent of the time-series volatility observed between Manhattan and other United States cities arises between Manhattan and other New York City locations. This is surprising because neighboring locations should respond to similar economic fluctuations

One quibble: high levels of tourism make New York City somewhat of a special case here. Some of the McDonald's locations Landry identifies as having the highest prices -- Penn Station, Times Square, JFK Airport -- have higher prices because the people buying Big Macs there aren't local. I'd imagine geographical location is less important than whether or not the restaurant is in an area frequented by non-New Yorkers. (Also, the McDonald's in Times Square has a damn piano player.)

Then again, who's to say that the McDonald's locations the Economist is using for it's numbers in Beijing or Nairobi are any more representative of local conditions?

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