Economy


This post was originally published on July 31, 2013. It was updated on November 11, 2013, August 3, 2014, and again on August 2, 2016 to reflect the new GDP numbers. Extending our research on the use of the Big Mac Index, as created by The Economist, we applied the rise in the price of a Big Mac in relation to the economy. While Big Mac prices rose over the last three months, the price overall declined in the past 12 months. The burger, as a representation of GDP, may be stealing more than calories from consumers. The Bureau of Economic Analysis (BEA) reported that in 2015, the economy grew 1.2%. This was far below economists’ expectations reported by Briefing.com. As the BEA indicated in the press release “The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE) and exports that were partly offset by negative contributions from private inventory investments, nonresidential fixed investments, residential fixed investments, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.” The deflator used for inflation was up 2.2%, which was far higher than the Consumer Price Index (CPI) of 0.8%. Under estimating inflation results in correspondingly optimistic growth rates. This resulted in the GDP number being significantly higher than it would otherwise be if the CPI was used. Odds and Ends The BEA defines gross domestic product, the measure of economic growth as: GDP = private consumption + gross private investment + government spending + (exports – imports) Taking it one step further, we can break this down to by private consumption into service and actual goods and investment into fixed investment (machinery) and inventories. When looking at GDP with all its components, we can see that real final sales was the strongest, but all other components have weakened over the course of the last 12 months. Doug Short graphically represents the components of GDP. Burger Blues Inflation boosts the growth rate of each of the components of GDP. When the price of food or gasoline increases, GDP increases. This is more accurately called “real” GDP. Thanks to The Economist, we have come to look at the price of the Big Mac as a good indication of inflation. The Big Mac includes beef, dairy (cheese), wheat (bun), cost of labor, and the cost of real estate. As a result, I believe it is a good representation of inflation. However, our analysis indicates that the price of the Big Mac has continued to escalate much faster in recent quarters than the official government rate of inflation (CPI-U). Consequently, here...

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