Why do migrants send international remittances? They do so mainly because in caring about the well-being of their family and friends, they wish to convey purchasing power for a basket of goods and services. This is the same as individuals choosing among different goods and services to buy and consume (for themselves and for others), only that it crosses international borders. In considering how much to send, microeconomic theory would hold that the individual migrant will equate the marginal utility of a unit of value spent across all goods and services available, be that for themselves in their country of residence, or for friends and family in countries of origin or elsewhere. How much can migrants get for their hard-earned money? This depends on a range of factors, including the bilateral exchange rate and the relative cost of living, as well as the cost of making remittances (both in fees and exchange rate margins).
Enter the “ Big Mac Index.” It was “invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a burger) in any two countries.” Applying the Big Mac Index in the context of remittances gives an indication of how attractive it is for a migrant to purchase a basket of goods and services for themselves in their country of residence, compared with buying broadly the same basket for their family and friends elsewhere. That is to say, it gives an indication of how attractive it is to send remittances (other things equal).
For example, the Big Mac Index from July 2014 (covering 57 countries) indicates that in US dollar terms the sandwich cost $7.76 in Norway, compared to $3.04 in Pakistan. For migrants living in Norway and making remittances to family and friends in Pakistan, this means that the Big Mac is ‘available’ to them at a 61 percent discount in Pakistan, compared with what they would spend for the same burger in Norway. With the Norwegian krona overvalued and the Pakistani rupee undervalued according to the Big Mac Index, this is quite a bargain! However, it was even more of a bargain in July 2011, when a Big Mac in Pakistan was discounted by 71 percent compared to its Norwegian counterpart. This suggests that goods and services in Pakistan became 17 percent more expensive over the last 3 years. What happens when the cost of making remittances is included in this example? According to the Remittance Prices Worldwide database, the cost of sending money from Norway to Pakistan fell steeply from 14.9 percent of the value sent in the third quarter of 2011 to 5.8 percent in the third quarter of 2014. Still, this was more than offset by a lessening of the Big Mac discount, and taken together, the cost of that basket of goods and services became about 3 percent more expensive during this period from the perspective of the remittance sender in Norway.
The impact of such changes on the overall amounts sent is an empirical question warranting further study. Still, it will be worth also monitoring the Big Mac Index going forward as a ‘lighthearted’ indicator of the relative attractiveness of making remittances.
The EXCEL file with the data for the 88 corridors where both the Big Mac Index (July 2014) and the Remittance Prices Worldwide (third quarter 2014) are available can be downloaded here.
Enter the “ Big Mac Index.” It was “invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a burger) in any two countries.” Applying the Big Mac Index in the context of remittances gives an indication of how attractive it is for a migrant to purchase a basket of goods and services for themselves in their country of residence, compared with buying broadly the same basket for their family and friends elsewhere. That is to say, it gives an indication of how attractive it is to send remittances (other things equal).
For example, the Big Mac Index from July 2014 (covering 57 countries) indicates that in US dollar terms the sandwich cost $7.76 in Norway, compared to $3.04 in Pakistan. For migrants living in Norway and making remittances to family and friends in Pakistan, this means that the Big Mac is ‘available’ to them at a 61 percent discount in Pakistan, compared with what they would spend for the same burger in Norway. With the Norwegian krona overvalued and the Pakistani rupee undervalued according to the Big Mac Index, this is quite a bargain! However, it was even more of a bargain in July 2011, when a Big Mac in Pakistan was discounted by 71 percent compared to its Norwegian counterpart. This suggests that goods and services in Pakistan became 17 percent more expensive over the last 3 years. What happens when the cost of making remittances is included in this example? According to the Remittance Prices Worldwide database, the cost of sending money from Norway to Pakistan fell steeply from 14.9 percent of the value sent in the third quarter of 2011 to 5.8 percent in the third quarter of 2014. Still, this was more than offset by a lessening of the Big Mac discount, and taken together, the cost of that basket of goods and services became about 3 percent more expensive during this period from the perspective of the remittance sender in Norway.
The impact of such changes on the overall amounts sent is an empirical question warranting further study. Still, it will be worth also monitoring the Big Mac Index going forward as a ‘lighthearted’ indicator of the relative attractiveness of making remittances.
The EXCEL file with the data for the 88 corridors where both the Big Mac Index (July 2014) and the Remittance Prices Worldwide (third quarter 2014) are available can be downloaded here.
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