Now that McDonalds opened its first restaurant in Vietnam this month, it will take a while to measure the effect on Vietnamese consumers — hungry for all things American but leery of the potential health consequences. But the fast food giant already has made a significant contribution to anyone considering living in or visiting Vietnam — thanks to Big Macs.
The entry of the company’s trademark oversized hamburgers on the streets of Saigon has immediately made Vietnam a member of The Economist’s Big Mac Index. The index is an elegant (though obviously imprecise) measurement of purchasing power in countries where McDonalds sells Big Macs.
So now we know that the Big Mac sells for the equivalent of $2.84 in Ho Chi Minh City, considerably less than the $4.62 price in the US. By comparison, the extremes in Big Mac pricing are $7.80 in Norway and $1.54 in India. The Economist arrives at those numbers by dividing the price charged at McDonald’s by the official exchange rate of the country; In Vietnam, consumers pay 60,000 Vietnamese dong for a Big Mac, and the Economist used 21,090 as the exchange rate.
What’s interesting about this is that the index indicates the actual cost of living in Vietnam — as opposed to the implied cost you get from the official exchange rate. In this case, it suggests Vietnam is much cheaper than you’d expect. In fact, if a Big Mac (and presumably everything else) cost as much in Vietnam as in the US, we’d be getting 12,975 VND for our dollar rather than the 21,090 the bank offers.
Purchasing Power Parity is a relatively good way of understanding the true cost of living in a foreign country, but it is tends to be subject to the biases of whoever calculates it. The Big Mac Index is a convenient way to demonstrate that Vietnam is an inexpensive place to live — at least until McDonald’s raises its prices there.