Economic Letter—Insights from the Federal Reserve Bank of Dallas

Provides timely commentary on the important trends and policy issues shaping our rapidly globalizing, increasingly interconnected economy. Published monthly.

The Big Mac: A Global-to-Local Look at Pricing
by Anthony Landry

Readily tradable goods—oil, chemicals, metals and agricultural commodities, for example—tend to sell at world prices. Nontradable goods and services—housing, cab rides and such personal services as haircuts—are largely insulated from global competition, and their prices can vary from place to place.

Whether goods are tradable, nontradable or somewhere in between influences the international transmission of price fluctuations. Rising prices in tradables are highly likely to spill across borders, while rising prices in nontradables are not. A better understanding of factors that determine prices should help the Federal Reserve and other central banks incorporate foreign price movements into monetary policy decisions.

That brings us to the Big Mac and what it can teach us about pricing. McDonald’s iconic hamburger is a tiny bit of the world economy, but it’s often used as a rough gauge of relative prices across countries. Since 1986, The Economist magazine has been publishing a Big Mac Index, comparing the hamburger’s international prices.

The index shows how much Big Mac prices vary from one country to the next. What’s less well known is the extent to which Big Mac prices diverge across the U.S., regions, Texas and even Dallas. The reasons for the disparities help us sort out how international, national, regional and local factors shape prices—at least for one product. ...

Visit Economic Letter, September 2008 Download Page

You can read the publication online, or you can download full publication in PDF format.

Vol. 3, No. 9 November 2008
Federal Reserve Bank of Dallas

Download Economic Letter, September 2008

PDF format, 3.2MB.

Landry is a research economist for the Federal Reserve Bank of Dallas’ Globalization and Monetary Policy Institute.

A New View of Globalization

Globalization is increasingly changing how nations interact in the economic sphere. In 2007, the Federal Reserve
Bank of Dallas created the Globalization and Monetary Policy Institute to explore the deepening economic integration among countries and better define the forces that shape the world economy.

The institute is particularly interested in furthering our understanding of how these changes alter the environment in which monetary policy decisions must be made.

Read more about the mission of the institute, the influential people behind it and current research at http://dallasfed.org/institute/index.cfm.

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