I have an assignment that requires me to pick an item and use it to create my own price level index, similar to Big-Mac index.

In March 2021, the price of 0.5 litre Coca-Cola in France was 0.97 Euro and in the United States was 2.75 USD. Therefore, the “Coca-Cola exchange rate” was 2.84 USD per Euro. (Source: https://www.globalproductprices.com/France/coca_cola_price/)

However, in 2018 the price of Big-Mac in France was 4.2 Euro. Meanwhile, in the United States it costs only 5.65 dollars. This ratio is 1.35 USD per Euro, approximately half of the one derived from price of Coca-Cola. (Source: https://data.nasdaq.com/data/ECONOMIST/BIGMAC_FRA-big-mac-index-france, https://data.nasdaq.com/data/ECONOMIST/BIGMAC_USA-big-mac-index-united-states)

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    $\begingroup$ I find the example of Coca Cola interesting, but you have to remember that Coke is mainly bought in supermarkets, which set the price themselves. This is different from the Big Mac sold directly in a McDonald's. I would consequently think about an example where a product is sold directly by a branch of the company in question. An example of this could be a typical footlong tuna sandwich from Subway. $\endgroup$
    – chopschoc
    Nov 3 at 8:29

This could be for several reasons:

  1. this can be because coca-cola is tradable good whereas Big Mac is non-tradable. You would expect the law of one price to hold better for tradables than non-tradables. Even though the prices/wages in tradable sector affect those in non-tradable (e.g. Balassa-Samuelson effect), there is no good reason to assume the law of one price actually holds for non-tradables.

  2. Limitation of Big Mac or Coca-Cola etc indexes are that they also capture effect of local taxes, import duties, competition etc.

    As far as data show the taxation in the US and France are not exactly same (e.g. see OECD and USCIB).

    As pointed in the comments there are likely differences between level of coopetition in US vs Fr retail, and fastfood.

  • $\begingroup$ Regarding (1), the opposite seems to be true: the Big Mac exchange rate is close to the actual market rate, while the CocaCola rate is much different. So I suspect (2) is the reason. $\endgroup$
    – Daniel
    Nov 7 at 14:46

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