Why does Venezuela have such a high Big Mac Index?

Question

Venezuela is ranked #2 in the 2014 Big Mac Index at \$7.15 per Big Mac. You can see the graph here. However, Venezuela is not a very rich country, having a gross domestic product of \$11,789 per capita.

There are at least 20 McDonalds in Caracas, so there is a fairly large supply. With a small gross domestic product the quantity demanded should be smaller by high prices. Even if the market for Big Mac-like products is a monopoly in Venezuela, I still think the price shouldn't be that high.

Another thing that is remarkable is that after 2014, the price had a rapid decrease. Maybe the transformation from a monopoly market to a monopolistic competition market caused it rapid decrease in price in June 2015?

In short the questions:

• How could the price of a Big Mac be so high?
• What caused it rapid decrease in price?

Answer 1

It is worth noting that Venezuela has had currency controls in place for quite some time now, so the locals cannot get dollars at the world exchange rate.

On January 2010, the government of Venezuela created a two-tiered official exchange rate system. Imports designated as "non-essential" receive a rate of 4.3 bolivares per dollar, and "essential" goods are exchanged at a rate of 2.6. There is also a third and unofficial exchange rate in the black market valued at around 6.8 bolivares per dollar (March 2010). The Venezuelan government decides what "essential" goods qualify for the 2.6 rate. They include imports for sectors related to food, health, education, equipment, and technology; remittances to relatives settled abroad; students' academic expenses abroad; expenses related to health, sport, culture, and scientific investigations; payments to retired and resident pensioners abroad; and currency conversions related to diplomatic activities.

The dollar value of a Big Mac at the official Venezuelan exchange rate is less than \$7.15.
(If my deeming it non-essential is correct it would be around \$2.50.)

---

Truth be told I am surprised they still have McDonald's restaurants in Venezuela, because long time president Chavez chastized US companies strongly and frequently and I think everyone associates McDonald's with the US.

Answer 2

Note that the index is computed with data provided by local administrations... And Venezuela's Central Bank is certainly not a reliable source - when it reports any data at all.

Therefore, you should take Big Mac index for Venezuela with a lot of precaution: first, the inflation rate in Venezuela is not really known, we only have access to estimates, and secondly there are two markets for the currency: an official and a black market, which display significantly different exchange rates.

A good read on the topic is provided by The Economist: Crackers in Caracas

Answer 3

What I see in the table is this:

Price: $0.67 (Bolivar 132.00), Raw index: undervalued by 86.0%, Actual exchange rate: 197.00, Implied exchange rate*: 27.56

where did you get the $7.15 price tag for Venezuela?

Big Max index is based on the idea of PPP. The way you look at the index is this, as you said Big Mac is $7.15 in Venezuela, it is more expensive than in the USA, around 1.5 times higher, in fact.This implies Bolivar is appreciating against the USD. But, according to the index Bolivar appears to be hugely undervalued, by 86%! Also, Big Mac is more expensive in developed countries, just look at the prices from Norway and Switzerland, their currencies are overvalued.

EDIT: Okay, now I see why. I think these fluctuations are likely due to misalignment, tariffs also play role along with tastes. Also, this link gives you a slightly different perspective.