Archive for the 'big mac index' Tag
This article was originally featured at Real Clear Defense.
“Show me the money” is the mantra of those analyzing Chinese defense budgets, searching for every defense dollar hidden behind state-owned defense enterprises and construction projects. But perhaps what they should be asking is, “where’s the beef?”
Every traveler knows that money is only as good as what it can buy. What you find on the dollar menu on one side of the border may cost $2.05 on the other. A lack of this purchasing-power-parity perspective is a major flaw in standard comparisons of annual defense spending. Analysis of the U.S. and Chinese defense budgets should not concentrate on dollar-vs-dollar, but rather the meat of what those budgets can buy.
For a quick non-scientific assessment of defense budgets weighted by purchasing-power, we look to the Big Mac Index (BMI, no pun intended). In 1986, the Economist developed the BMI as a humorous way of gauging the accuracy of currency valuations world-wide. What started out as educational humor became a serious academic endeavor. The BMI is so effective that the infamous currency manipulating government of Argentina’s Cristina Fernández de Kirchner has passed laws regulating the sale and marketing of the Big Mac. Although the Economist has produced a “gourmet” version controlling for local factors such as differences in labor costs, it is those local market defects that make the raw BMI appropriate for defense budget analysis – the analysis is not of currency on the exchange floor, but on the shop floor.