As of January this year, the price of a Big Mac in Korea, converted to U.S. dollars, was nearly 40% cheaper than in the United States. Since 2000, the price gap for Big Macs between the two countries has widened to its largest. In both countries, Big Mac prices have risen 20% since 2021. But as the won-dollar exchange rate surged and the value of the won fell, a kind of optical illusion appeared.
◇ As the won weakens... Korea's Big Mac becomes 40% cheaper than in the U.S.
According to the British weekly The Economist on the 7th, Korea's Big Mac Index stood at $3.7 as of last month. The Big Mac Index converts the price of a Big Mac sold at McDonald's in major countries around the world into dollars. The Korean Big Mac price (5,500 won) was divided by the won-dollar closing exchange rate in mid-January (1,469.9 won) to calculate it. Compared with a U.S. Big Mac ($6.1), the price is 39% cheaper. The Korea-U.S. Big Mac price gap was the largest since 2000.
This is largely due to the decline in the value of the won. Looking at Big Mac prices over the past five years, both Korea and the United States saw increases of 20%. In Korea, the price rose from 4,600 won in early 2021 to 5,500 won recently, while in the same period the U.S. Big Mac price climbed 20% from $5.1 to $6.1. However, the won-dollar exchange rate rose 32%, from 1,086.3 won on the last transaction day of 2020 to 1,439 won on Dec. 30 last year.
Although hamburger prices rose, the value of the won fell by a bigger margin. That means the real purchasing power of the won has weakened. The Economist said, "Based on last month's Big Mac Index, the won is undervalued by 38.9% against the dollar."
◇ The Korea-U.S. Big Mac price gap widens during each economic crisis
Historical Big Mac Index data show Korea's Big Mac has consistently been cheaper than in the United States since 2004. In addition, when the value of the won fell during global economic crises, the dollar-based price of a Korean Big Mac tended to become much cheaper than in the United States. During the global financial crisis in 2009, Korea's Big Mac Index was $2.6, 26% cheaper than the U.S. ($3.4). In 2020, when the spread of COVID-19 began, the price gap exceeded 30%.
Generally, countries with higher gross domestic product (GDP) tend to have relatively more expensive Big Macs, because labor costs and rents are higher. In response, The Economist also releases a Big Mac Index adjusted by each country's GDP per capita. This index allows a gauge of how much each currency is overvalued or undervalued against the dollar. The won was found to be undervalued by 32% against the dollar.
Other Asian countries showed larger currency depreciations than Korea based on the Big Mac Index. On a GDP-adjusted basis, Taiwan's currency was found to be undervalued by 59.6% against the dollar, and Japan (-46.5%), Indonesia (-45.9%) and the Philippines (-38.2%) also saw large depreciations.
◇ When the exchange rate rises 32%, import prices climb 39%
In the past, many believed that a weaker won boosted export competitiveness and helped the economy. But now, semiconductor corporations that lead Korea's exports are posting strong results regardless of the exchange rate thanks to a surge in demand.
By contrast, a higher won-dollar exchange rate pushes up import prices, burdening the public. When import prices rise, the prices of imported raw materials and consumer goods follow, so Korean consumer prices also rise with a lag. According to the Bank of Korea, over the past five years, when the won's exchange rate against the dollar rose 32%, import prices climbed 39%.