Big mac affordability and income inequality across the European Union

Abstract

Purpose

The primary purpose of this study is to assess economic inequality within the European Union (EU) using Big Mac Affordability (BMA) as a metric. By comparing the BMA across different EU countries, the study aims to highlight purchasing power disparities between core and peripheral nations as well as between high-income and low-income households. Additionally, the research explores the potential impact of income transfers on reducing inequality, offering insights for policymakers to address economic disparities within the EU.

Design/methodology/approach

This study employs the Big Mac Affordability (BMA) as an alternative measure to GDP per capita and disposable income for examining inequality across European Union countries. The methodology involves calculating the purchasing power of EU countries and residents by adjusting their disposable income with the BMA, derived from the nominal disposable income and the nominal price of a Big Mac burger. The study uses Gini coefficients, both population-weighted and unweighted, to assess inter-country inequality and the disparity between different income groups within the EU. Data are sourced from The Economist's Big Mac Index and Eurostat.

Findings

The study reveals significant inter-country inequality within the European Union, with the Big Mac Affordability (BMA) highlighting stark disparities in purchasing power between core and peripheral countries. The COVID-19 pandemic exacerbated these inequalities. The analysis shows that EU purchasing power has generally declined or stagnated since 2000, with substantial gaps between different income groups. The study also demonstrates that targeted income transfers, such as a hypothetical 10% transfer from top-income to bottom-income households, could significantly reduce inequality across EU countries.

Research limitations/implications

The Big Mac Affordability (BMA) index, while valuable, has limitations. It relies on a single product to represent purchasing power and omits non-traded goods and services, which can undermine its accuracy. This reliance necessitates complementing BMA with other economic indicators for a comprehensive understanding. Additionally, the index needs refinement to accommodate cultural and contextual factors. Future research should incorporate these elements to enhance the index's applicability in assessing global economic disparities and to explore its relationship with other economic indicators for a more nuanced understanding of inequality.

Practical implications

The study’s findings have significant implications for policymakers in the European Union. The Big Mac Affordability (BMA) index reveals substantial disparities in purchasing power across different EU countries and income groups. By highlighting these disparities, the BMA can inform more targeted and effective policy interventions aimed at reducing economic inequality. Specifically, the study suggests that modest income transfers from high-income to low-income households can significantly reduce inequality. Policymakers can use these insights to design equitable redistribution strategies that enhance economic cohesion and stability within the EU, particularly in times of economic crisis.

Social implications

The study highlights significant social implications arising from economic inequality within the European Union. High levels of inequality, as shown by the Big Mac Affordability (BMA) index, reveal substantial disparities in purchasing power between core and peripheral EU countries as well as between high-income and low-income households. These disparities can lead to social tensions, migration patterns where individuals move from less affluent to more affluent regions and a general decline in social cohesion. Addressing these disparities through targeted income redistribution policies could enhance social stability and promote a more inclusive and equitable society within the EU?

Originality/value

This study innovatively applies the Big Mac Affordability (BMA) index to assess economic inequality within the European Union, providing a novel perspective compared to traditional measures like GDP per capita and disposable income. By focusing on purchasing power parity through the lens of a commonly available consumer product, the study highlights significant disparities in purchasing power across different EU countries and income groups. This approach offers a unique and practical tool for policymakers to understand and address economic inequality, emphasizing the value of BMA as a supplementary metric for analyzing and formulating economic policies.

Citation

Akarsu, M.Z., Gharehgozli, O. and Atal, V. (2024), "Big mac affordability and income inequality across the European Union", Journal of Economic Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JES-06-2024-0421