Thinking about the Big Mac Index

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Everything here in Switzerland is super expensive. The price of an espresso at a wonderful pastry shop in downtown Zurich, for example, is 5.30 Swiss Francs. Adding water to that for an Americano raises the price by two bucks.

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The exchange rate between the Swiss Franc and the Dollar is nearly one-to-one. Yet the price of an espresso is probably on average twice as expensive. 

That drives home the point that exchange rates are a bad indicator of the cost of living. 

This is an important fact for Amira and me, who live abroad much of the time. And it's a point I make in my book: Nomadism gives you enormous flexibility in your cost of living. By choosing a country and city or town to live in, you're choosing how much everything will cost. 

A better indicator is The Big Mac Index, invented by The Economist years ago. It compares the relative price of a Big Mac in different countries, which is supposed to factor purchase power, not exchange rates. 

Here's the most recent accounting on The Big Mac Index, a pulse taken in January. 

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As you can see, all the places we've been living lately -- Switzerland, the United States, Italy and France -- are in the top 8 most expensive countries, according to The Big Mac Index. 

There are several things wrong with the index as a guide for nomads. 

The most obvious one is that, for us, France was far more expensive than Italy. Yet The Big Mac Index shows Italy more expensive than France. 

The less obvious but more significant fact is that locations within countries vary wildly. For example, the cost of living in San Francisco, California, is many times higher than the cost of living in McAllen, Texas. 

One alternative is The Starbucks Index, which compares the price of a latte. That may be more relevant to me, personally, because I do buy lattes but do not buy Big Macs. 

Another problem is that while exchange rates are calculated minute-by-minute, the purchasing power metrics are calculated annually, to the best of my knowledge. 

The biggest lesson is that burger- or coffee-based indices, despite their flaws, are better indicators than exchange rate, as the Swiss example proves. And they can be used as a general guide to cost of living. For example, in general The Big Mac Index showed that in January, Switzerland was super expensive and Ukraine was super cheap and that India and Mexico, while not the cheapest destinations in the world, are still great bargains right now. And this is good guidance. 

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