Wednesday, May 31, 2006

My Coconuts are Better than Your Big Macs

No they are not. While we're on the subject (fast food, not coconuts), let me belatedly say "Happy 20th Birthday!" to the Big Mac index. For those unfamiliar with this index:
"...The Economist's Big Mac index is based on one of the oldest concepts in international economics: the theory of purchasing-power parity (PPP), which argues that in the long run, exchange rates should move towards levels that would equalise the prices of an identical basket of goods and services in any two countries. Our “basket” is a McDonald's Big Mac, produced in around 120 countries. The Big Mac PPP is the exchange rate that would leave burgers costing the same in America as elsewhere. Thus a Big Mac in China costs 10.5 yuan, against an average price in four American cities of $3.10 (see the first column of the table). To make the two prices equal would require an exchange rate of 3.39 yuan to the dollar, compared with a market rate of 8.03. In other words, the yuan is 58% “undervalued” against the dollar. To put it another way, converted into dollars at market rates the Chinese burger is the cheapest in the table...."
With a Big Mac costing Rp 14,400 in Jakarta, rupiah is 49% "undervalued" against the dollar. Of course, no one is arguing that Big Mac is representative of what Indonesians are gobbling up. In fact, any Indonesian worth his paket hemat would know that we go to McDonald to get them chicken.

It turns out that several years ago, the financial giant UBS created an alternative Big Mac index, based on how long (in minutes) a typical worker would need to work before he earn enough money to buy a Big Mac. The 2005 numbers say that a typical worker in Karachi would have to work for 132 minutes to be able to buy a Big Mac. It would have taken 64 minutes of work for a typical Jakarta worker to be able to afford one (alternatively, he only needs to work for 19 minutes to get 1 kg of rice). Bangkok: 46 minutes, Singapore: 20 minutes (New York: 12 minutes). Like most cross-country indices, the numbers are more fun to look at than they are useful (what is a typical worker anyway?).

Dissapointed with these indices, Ms. Thu-Tam Doan, a travel writer, once proposed the use of her coconut index to compare purchasing power parity and cost of living in Southeast Asia,
"...I assumed that like all men, all coconuts too are created equal.....I took the given variables, the per capita income of each country in US$ and throughout my travels have noted the average cost of their coconuts. I divided per capita income by 365 to find their daily wages, then compared the cost of a coconut as a ratio to their wages (X:Y), where X = cost of 1 coconut as a fraction of their daily wages, Y....
..and so it went on. According to her calculation, in Indonesia, a daily wage would buy you around 12 coconuts. A daily wage in Thailand would buy you 24, and in Singapore 81. I don't know how useful those numbers are. But that's a lot of coconuts.

To her credit, Ms. Thu-Tam Doan recognizes the flaw of this index ,

....In conclusion, coconut quality inherently attributes to coconut cost, thereby influencing purchasing power parity (eg. the standard of living). This Coconut Index was a lot more work than I thought it would be - too much work for someone who is aimlessly traveling.

I give up.

Sound decision. Coconuts are not created equal after all. So I guess we're stuck with the Big Mac index, maybe for another 20 years. In the meantime, tall latte index is now a toddler.

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  1. Ujang, I found the coconut's is more interesting. Beside, BigMac in Indonesia is indeed around 49 percent smaller in size than in US (caveat: subject to further research) :-)

    FYI, aco and I would like to create black coffee index. No, not for purchasing power parity or inflation. We just want to know where the best coffee place in Jakarta is (taste, mug cleanliness, barista's knowledge, population of female visitors(aha!), etc). Care to join us the picky coffee freaks, buddy?

  2. Must you include the female visitors in that equation , Rizal????

    I like the Tall Latte Index.....a tall latte in any coffee house in the States cost about $2.65- 2.75, how much is it in jakarta? I'm guessing it should be around the same price, denominated in Rupiah??

  3. That's so politically incorrect, Rizal, viewing things only from your perspective (i.e. heterosexual-married-but-flirtatious-man). For the benefit of all, you need the ratio of female/male as well as the total number of each.

    The latte index is nice, although I think it's even more urban-oriented than the Big Mac index. Besides, being a serious coffee lover that you are, you'd at least be disconcerted that it's based on Starbuck's latte. Nuff said.

    For comparisons within Indonesia, something ubiquitous like makanan Padang is probably more appropriate (rendang index?), but then people tend to get too personal about local dishes.

    Any other suggestions?

    It's nice knowing that if all else fails, we can always go back to the boring, but more reliable official numbers.

  4. I think I've heard my crime partner in coffee business, aco, said it loud: latte ain't coffee, dude :-). That's why we narrow it down into only black coffee. No sugar, please :-)

    But you made a point, jang. Why Big Mac, and later Starbuck's latte? Because you, and The Economist, don't believe in Central Bureau of Statistics (read: government). You, typical :-)

  5. perhaps you can come up with an economic index for the regions, maybe something that people in southeast asia all consume, like rotiboy hehe

  6. [teasing mode on]

    Yup, you're right on, Rizal. Latte ain't coffee! Real coffee should be black, sugarless, and strong. Even cappuccino is transexual, while decaf is a total crime. [Now you know why I hate that Filosofi Kopi].

    [I recall the day when Ujang, Ira (where are you, Ira?) and me were grading students' Perekonomian Indonesia exam in one of those cafes in Kemang. Ujang revealed himself as a professional espresso sipper -- double-shot bottom-up! He's not really a latte person, I'm telling you]

    Btw, Enda's suggestion is cool. But I'd rather dunk J.CO into my free-trade arabica :-)

    Ah, it's Friday already. Have a great weekend, everybody! Don't worry, we still serve non-coffee coffee :-)

  7. Oh, I guess I missed the point, didn't I?

    The point was Rizal being a male-chauvinist pig, right? That is true, he is a big time male-chauvinist pig.

  8. Can't find J.CO donuts here in Bangkok yet hehe.

    Rotiboy is easier because they only sell one type it, which is in Bangkok cost 25 baht. :)

  9. ah you male-chauvinist pigs... i would love to join your elite group of course, only if you let this girl sip her latte undistrubly... no sugar of course, it's just that my stomach cannot tolarate too much acid from the esspreso... there's a new place opened around cikini: Cafe Au lait... nice coffee (can't beat bakoel koffie of course), good ambiance and nice-friendly-pretty host ( yuni gitu kalo gak salah)... interested?

    being serious, why not using rice index instead? consumed by most of asian people. personally, i think big macs here are a bit overpriced...

  10. let's try with credit power. how many mugs i could possibly buy now pay later? or, gift power. how may someone possibly buy me coffee every day?

  11. Aco, because of you, now those students know where the stains on their exam papers came from.

    Enda, rotiboy does look really good. But what is it exactly? More description please? Read how Detta describes

    dHani, you're accusing us of being male-chauvinist pigs and then you're telling us about Yuni the nice-friendly-pretty host? What does that make you? I don't know whether Rizal is a male-chauvinist pig, but judging on his comment above, he sure has a Big Mac envy. Okay, before this escalates into a full-scale name-calling feast, we all should visit Rizal's home and see how untrue these accusations are.

    There is a better way to describe Aco. Judging on how he solves the chicken vs egg question(read the pdf file if you haven't), he is definitely a certified geek.

    And dHani, yes, if you have to choose a single good, it should be rice. It has to be the same quality of rice everywhere, though.

    The Big Mac index works because Big Mac is a product known for having the same quality everywhere (I said same not high, okay), a really important feature. The other important feature: a Big Mac is like a mini basket of different goods bread, meat, veggies, oil (wait, are you sure it's meat?), and services. A rotiboy probably meet the first criteria but I don't know about the second.

  12. how bout something like the price of night's stay, in a dorm-room bed, at a global hostel chain (let's take this one, my fave:

    or the local currency equivalent of a no-frills intl hotel (e.g. Novotel, Best Western?)? their prices are more flexible so can even change on a daily basis (in local currency), and if you compare only those similarly situated, seasonal impacts are small...

    kalo the daily wage of a standardized pembantu gimana, for asia this should work huh?

    hey, you guys should post fun things like this more often, see how many comments you get!

  13. okay guys,let me defend my position -and some comments:

    #1. I am no chauvinist pig (Thanks, Ujang for a helpful clarification. And Aco, look who's talking, dude). The truth is that I am just a shy guy (yes, sing it, baby :-); or to be more precise, whatever people say I am, that's what I'm not :-)

    #2. dHani, I am afraid sugarless coffee is an ultimate condition - apart from being chauvinist, haha. And aco, mind you,please keep your remark on cappucino and decaf for yourself. That's, what should I say?, gender biased and politically incorrect for our (females) audiences --our hypothesis, the ladies love that kind of beverage more, no?

    #3. On grading in one of Kemang cafes, there must be a hidden agenda of those young TAs. No, not that the coffee is so good there.

  14. In fact, Rizal, I should thank everybody who drinks cappuccino, macchiato, latte, mocha and all that (regardless of their gender). Because without them, Starbucks, Coffee Bean, Seattle, etc will not survive.

    Tim Harford has it right there in Chapter 1 of his Undercover Economist.

    No offense :-)

    Free coffee today, right, Manager?

  15. This comment has been removed by a blog administrator.

  16. Aco, yeah, but in the chapter 2 of the same Harford's book, those companies also use overpriced cappucino or latte sales to reveal customer preference on price --whether they're price sensitive or not-- for eventually applying price discrimination strategy.

    I mean, if grading up your black-coffee to latte needs milk that costs you additional 5p, but you can sell the latter 1 quid higher well, then you know that your consumers are price insensitive.

    As for myself, I don't like being ripped-off twice: on my consumer surplus, and, even worse, on the degrading quality of my cup of coffee. Subjective indeed, but so what? :-)

    And no offense, too :-)

    Oh, one more thing, I don't buy the idea of free coffee for it must be a lousy one. :-)

  17. What, grading up my black coffee to latté? You must be kidding.

  18. I am expecting such response from you, Co :-). I know, it should be a down-grading. And I said I don't like degrading my cup of black-coffee to latte --and pay more for that.

    Man, we're officially coffee freaks, now.

  19. Hey, whatever happened to de gustibus non est disputandum? We start talking about bread and coffee and before you know it you all went disputatio (yeah, I don't know Latin either) on each other as--s?

    Aco, you talked about this before. It's even clearer to me now why The Economist stay with the Big Mac index.

  20. Fantarara, I'm more interested in hearing your suggestion on some kind of a food index considering how well-traveled you are - abroad yes, but particularly for this purpose in Indonesia- and how passionate you are about what you eat.

    But your suggestion on the price of maid services and your blog entry on wages of drivers really intrigued me. I wonder if there's been any studies looking at changes in wage structure of these domestic services over the last decade (I know drivers didn't use to have the "monthly base+hourly wage" pay structure). How much have these changes affect consumption patterns of people in the urban-white collar sector, labour supply of urban women, oh and so many other things....and not to mention the story from the supply side of these laborers....

  21. Ujang, if you must know, Yuni-the-pretty-face host of cafe is my way to become the member of rizal's coffee house... in other word, the message is i am the friend of male chauvinists pigs, or worse... economist... :p
    what does that make me? the female opportunist economists... hahaha...

    come on... you have to spend a lot of time with rizal and aco (in the real world, email and blog isn't included) to understand what actually happened in the comment room... hihihi... this isn't name calling feast... trust me, this is far from that...

  22. Yes, Rizal, he did write that book, but according to my interpretation, his and Stigler's approach on how economists should deal with tastes - "to usefully treat tastes as stable over time and similar among people", is akin to assuming preferences are the same. They then argue that economics should be about explaining changes in behavior that are primarily driven by changes in opportunity costs. So there is indeed accounting for tastes but it seems that at the end there shouldn't be a lot of dispute about them. In other words, at the end, it’s almost like des gustibus.... I may be very wrong, of course.

    dHani, I can only suspect what goes on in the real world between them -and you included- and that's why I think things are better left where they are: online (haha..) Well, that's not true: I had a real world interaction with them about three months ago and came out unscathed.

  23. Quoted from Ujang:
    "Besides, being a serious coffee lover that you are, you'd at least be disconcerted that it's based on Starbuck's latte"

    Yes, I know this is an old post, where starbucks was probably not common in Indonesia yet. What amazes me, now it is, Starbucks in Jakarta costs (almost) the same whether in rupiahs or dollars. Even more intriguing, considering the cost, they sell like hot cakes!!!!! Is this the sign of the economy getting better, or simply a sign that Indonesian people has convinced that the mega-consumerism-western-style-living is the way?????