Central Ohio Center for Economic Education - www.cocee.org

Happy Meals around the World: Does One Price Fit All?

By Billy J. Britt, Federal Reserve Bank of St. Louis-Little Rock Branch

Lesson Description

Students enjoy eating Big Macs every day. McDonald's offers a fairly standard menu around the world. Because McDonald's is present in so many different countries and has such highly standardized menus, The Economist magazine began an annual feature comparing prices of the Big Mac sandwich in different countries as a way to explain relative currency valuations. This lesson teaches the economic principle of purchasing power parity, as well as why prices aren't always the same wherever you go.

Grade Level

Grades 6-8

Concepts

Exchange Rates

Productive Resources

Purchasing Power Parity

Content Standards

1. Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they must choose some things and give up others.
2. Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.

Objectives

Students will:

1. Define factors of production (natural resources, human resources, capital resources, and entrepreneurship).
2. Give examples of each factor of production.
3. Describe purchasing power parity as a theory of exchange rates, whereby an equivalent unit of any given currency should be able to buy the same quantity of goods in all countries.
4. Understand that the exchange rate is the rate at which a person can trade the currency of one country for the currency of another.

Time Required

2-3 class periods of 45-60 minutes

Materials

1. Student copies of the Big Mac Index
2. Empty McDonald's Happy Meal box (If you have one from a different country, that would be even better!)
3. Pictures of currency from different countries
4. The Story of Foreign Trade and Exchange (Classroom copies available upon request from the Federal Reserve Bank of New York, http://www.newyorkfed.org/publications)

Procedure

1. Hold up a McDonald's Happy Meal box. Have the students tell you what goods are usually found in a Happy Meal. Explain to them that Big Macs are standard in almost any foreign country they might visit. Why would McDonald's want to do this?
2. If you have a model of a hamburger that has the ingredients of a Big Mac, use it in a discussion of what goes into producing a Big Mac. Describe factors of production to the students. Explain that factors of production are the resources used in producing goods and services. In order for the students to understand all factors that go into producing Big Macs, have them brainstorm for all of the resources used in getting a Big Mac to them.
3. On the board write the headings NATURAL RESOURCES, CAPITAL RESOURCES, HUMAN RESOURCES and ENTREPRENEURSHIP. As the students tell you a factor of production, list it under the correct heading. For example, under the heading NATURAL RESOURCES, trees, oil, onions and cucumbers go. Under HUMAN RESOURCES, you might have cooks, farmers, sales clerks and managers. Some goods can go under more than one heading; for example managers and farmers might also be entrepreneurs. Under CAPITAL RESOURCES, things like spatulas, grills, counters and buildings might be listed.
4. Have the students write a paragraph on what might happen if one of the factors production wasn't available for a Big Mac to be made. Use these paragraphs as discussion starters to wrap up this lesson on factors of production.
5. Have samples or pictures of currency from different countries for the students to examine. Talk about the value that these currencies have. Then explain the concept of exchange rates. One Web site that has pictures of currencies around the world is http://ease.com/-randyj/money1.htm. A good teacher/student resource is the comic book The Story of Foreign Trade and Exchange.
6. Ask: "Does a Big Mac have the same price in another country as the price you would pay here at home?" After several opinions are given, explain that purchasing power parity meansthat they should be able to buy the same Big Mac for the same price any place they go.
7. Explain that economists have a grocery basket of goods they use to determine the price of Big Macs. Help them to see the ingredients that are in a Big Mac by listing these on the board.
8. Pass out copies of the Big Mac Index. Explain the different columns to the class. Column 2 lists prices in local currency. The exchange rate for dollars is in the third column. Dividing column 3 into column 2 shows the price of a Big Mac in U. S. dollars, which is column 4. Give the students time to look at the first four columns. Why is there a wide variety of prices for Big Macs if they are all made the same way? (Discuss different prices of goods and services used to make Big Macs in different countries. Use the Big Mac Index for a guide.)
9. Now discuss columns 5 and 6 with your students. Column 5 shows average net hourly wages in dollars. The last column shows how many minutes of work are needed to buy a Big Mac. “Much of the discrepancy between Big Mac prices in different countries is explained by differences in wages and incomes rather than the cost of sesame seeds. A Big Mac – like many other goods – is more than just the sum of its components. The sandwiches are prepared and served by workers in restaurants that are also built and maintained by the domestic labor force. Thus the local wage rate is a factor in the total cost of serving a Big Mac. In addition, the local level of earnings affects the demand of McDonald's products” (from Inside the Vault, An economics education newsletter from the Federal Reserve Bank of St. Louis, Spring 2004, Vol. 9, Issue 1).
10. Give the students examples of the price of goods from different countries. Use the exchange rates given in the Big Mac Index to compute the amount they would pay for these goods in U.S. dollars (e.g., Big Macs cost 262.00 yen divided by the exchange rate of 120.0 yen per dollar equals $2.18 in U. S. dollars).

This article appeared in Portals, An exclusive publication for members of the Global Association of Teachers of Economics, May 2005, Issue 3. Portals is a publication of the National Council on Economic Education.

For more information, please visit http://www.ncee.net/gate

Central Ohio Center for Economic Education - www.cocee.org