THUNDERBIRD Seqa0e oF abAL wanACeMENT T0103, . 7 Fi Sein 6208 + Kasirone Dasie McDonatp’s in Invi {do not see anything. wrong with McDonalds doing business i lad, After al; We isnot MeDonaldsation tat we brow fli Big MaCeoninodeton are A Senior ieaicratia New Dai. In October 1996, McDonald's opened its frst Indian out in Vassint Vihar, an affluent eesidentil colony in Indiss capital New Delhi, As.of November 2004, McDonalds has opened a total of 58 restaurasits, mostiyin the northern‘and western patcof India (Exhibit 1)! While McDonalds opened 434 restaurants in five yeats (by 2001), 58 restaurants in sight years (by. 2004), itis nove plasnisig to add tmote than 90 new restaucants in the text three yeats.? Although the initial scenes of crowds lining up for days ouside the McDonalds xeitaurants in Delhi and Mumbai are no longer stea, Indian consumer response to McDonald's products sill remains wety stéong, “The cen MeDonal’s E visited in Mumbai and Delhi were packed wich young people, childeea, and young, parents enjoying, ice creams, spicy potato wedges (instead of the usual french frie), and Happy Meals. The growth of McDonald's in India is not as rapid as in China (Eshibit 4). Bur its growth is nevertheless impressive. How did MeDonalds do ie How did a hambucger chain become so promi ‘oént in a culeural zone dominated by non-beef, non pork, vegetarian, and regional foods such as chola ‘bhatura, kababs, bhaj, semosa, dose, vada, sambar; bhelpiri, and rice? The answer to this question lies in ‘McDonald's cacefally planned enery-and expansion strategy in accordance with'Indis changing politi- ‘al economic, ad cultural landscape inthe, 190s. The Indian Food Service Industey. With more’than five thousand ethnic communities represented, India has a very diveist popula Each region aad subregion in India has. distiict food traditions and preferences. Indian consumers iypically maintain thei discinee foot habits oven’ after migrating to-dilferent pati of the county. In large cities and metropolitan areas; some restaurants serve only specialty regions foods: Some regional fast foods such as samara, kebabs, chola bbattra: pak, aloo-parathi. podri-bbaji. dose, and sambiar- did are populae among Indian consimers and are avalabls'in both speciale and multi-euisine esta rants throughout India, = " ‘Most Indians piefer to-ear homniécooked foods and. take immense pride in the varieties of food cooked at hoine. Far most Indians, home-cooked foods ate considered fresh, healthy, and inexpensive Given the distince dietary habits and food preference of indian consumers, itis not surpeising thar unl the eatly 1990s Wesicen fase food chains had largely ignored Indian markets. As a result, Nias, the ‘nly notable {ndian fast Food chain; has been ble to dominate the Indian market in fst Food secvice sales. . jm Noveraber 2004, McDonald's eitered the southern part of (ndia with its fist resaurancin Bangalore, the s-aled‘Slicon Valley of lia, ¥MeDonalso Open 90 Outlet in Tree Vas,” Busines Standards June 24,2005. Copyright © 2005 Thunderbird, The Gerais School of International Managerent, All rights reeroed. T Arpad by Pofesey Kare Dh bud oni inervion ad "field research in India for the purpose of classroom ddscusion only, and not 0 indicate ether effective or inffciive management.“There até approximately 22,000 iepistered restaurants in india, In‘adldiign, diese ace:more thian 109,000 diab fall roadside food seal) that sella variety af foods cites aad on highviays, By 1998; there were approximately £,568 tegisteied botels ja In ‘wi testa sants? Ia addition, large to medium-range canteens serve the food nceds‘of various institutions such as hospitals, prisons, defense establishments, schools, colleges and ‘universities, railways, aitlines, govera- rent establishments, and private companies. Since 1994, Inclia’ food iinporis have been growivig mie than 37% per year. Half of India’s food imports are agricultural items such a ceteals, vegetables rats, wheat, arid nuis, One ofthe significant problems. of the Indian fod industry is an: inefficient food chain between Farmers ard consumers. ‘About 2086 of Indias food stoduction is wasted because of too maily intermedigits, poor infrasteuc- ture, and poor iransportation-failties: Considerable inefidency- in the food distdbucion system cus, facniers income while raising consumer food prices. Although India is the wotlds third largest food producer: its processing, industry is very small compated to other countries in Asia Europe, and the United Staves. Despite the lack of a well-developed food processing, industry, Indi izaports of ro" cessed consumer foods have ttaditionally remained Jow. Since the carly 1990s Tides Food! service dales have sig fast food matkets have'shown cor ‘acazed provessed and fast-food sales icaticly increased, India’ processed‘and rable potential for grow A iauenber of factors have dciven i + Grewing Income a “The long-teem growth trend in India is improving. The past shtee decades have seen a steady’ accel- ration. Average annual growth in GDP per head climbed from.1.2% in. the 1970s t0:3% in the 1980s 3nd 4% in the 19905, From 1972 to 1982, GDP grovsth averaged 3.5% a year—the so-called “Hindu tate of growth.” As a.rcsule of India's decade-long liberalization of economic policies, the growth rate climbed 10, 6% from 1992-2002 and is likely-to peach’ 79% by 2010. If this rate is maintained, GDP peer person will double in only 18 years. However, high GDP growth is confined 10 only the few scates with Godstal access anc! high levels of urbanization, The fastest-growing Indian states in, 1991-2007 were Delhi, Mabarashera, Karnataka, West Bengal and Gijeat.These states enjoyed annual average-economic growth of.6-8%, which is comparable to East Asian economies during the same peried. Bucthe economies of poor states lke Bihar, Utear Pradesh, Madhya Pradesh, Orissa‘and/Assam grew by a distal anual average of 2% oyer the same period <5 X Not atpisingly, income distibiaon i highly skewed in India, Just 2006 ofthe ehest Indians share rmore than 40% of the national income (Exhibie 2). Exhibic 3A gives a profileof average anna - hhouschold income: distribution in India: According 16-2 study by National Applied Economie Re search (2004), the number of households wich aa annial income over Taian Rupees (Rs.) 1 ctore (US $228,351) has grown bj 26% since: 1995-96 to 20, 000 in 2001-02. By 2009-10, i will increase ‘more than seven times 0 140,000 households. tn the Rs. 30 lakh (OS $114,180) to Rs. 1 crore (US. $228, 351) brackes,“the number of households is expected to inctease fron 40,090:in 200-02.t0 ‘over 250,000 in: 2009-10: : 7 Echibie 3B describes the change in average atinual household income distribution of low, lower, and high riddle class in Indias urbari and rural aceas feom 1989-90 to.2001-02, Italio provides a projec tion in income distribution of low, lower, and high middleclass for-the year 2009-10. In the Lt years following 1989-90, the cotal number of houscholds increased by 32%; although the average size of 3 USDA Foreign Agricul-ura Serice GAIN Report HIN9082, US. Exibassy, New Delhi, November 14,1999, 1p. 2-3. "Dacia Acvind Subesinasin, “Why tndia Can Grow a7 Percent Year or Moe: Peojections aid Reflécions,” IME Working Pape, July 2004 EIU, Businéss India Inulligence, January 26, 2005, Vol. 12, No. 2+). 5. 2 . TrBO103Indian households has declined from 5.9 people per houschokd in, 1990-46 5.2 in 2001, What is © “imporcain is tha che number of low-income uebin houscholds his been approximately halved, fom _-14.9-million- households in 1989-90 to 7.6 million in 2001-02,The number of low-income cural ioustholds has alto declined {tom 69 tillion in 1989-90 to 58. million it 2001-02. The graweh in incomes in the top band has been experiencel by both urban and-eual Households, both of which have roughly doubled as.a shate of the total population over the 1990s? The members of these Iouscholds have higher dispotable incomé and have shown greater propensity to spend oft fase foods. + Population Growth and Urbanization “Accoitding tothe 2001 census, India’s population grew ata tate of around 2% a year ducing the previous decae. This was a marked decline fei easier decades of populétion growth of around 3% anally. Nevertheless, India added 181 imilion people between 1990-2001, mare than the total jpopiilation of Beart According to the forecast of Goldman Sachs (an Ametican investment bank), the reason why India is expected to outperform Brazil, Russia, and China, aswel as the “tich would” (Guts, United States, Canada, France, Germany, Unived Kingdom); is that itis the only country where the population will continue to grow for the next 50 years and where the proportion of working-age ‘people will incteate wall into che 20208? ° ins. percentage of urban popuilation iia has increased fom 2196 ini 1975 t0 sore than ‘2896'in 2004 (Exhibit 2). Ic is Tkely ca cteaseto 36% iti 2025." Most high-incorixe Indians prefee to live it ucban ateas. Over 70% of affltene urban Indian consumers five in the ren most po and cosmopolitan cities in India: Mumbai, Delhi, Kolkata, Pune, Cheunais Hyderabad, Bangalore, ‘Ahmedabad, Ladhiana, sad Nagpur. The number of dual income households, where botk husband and wife work, is slowly increasing. in urbaa aceas. Lilee their husbasds fll-imie working women spend mast of their time away from home. As result, chet has been a dramatic change in the way Indian working isives shop and organize family meals. Packaged rice, prepared yoghurt, packets of flows, frozen chickens, aid marinated muttoit (goat or lamb meat) ate fast teplacitg cucdling, grind ings and handling of market-bought fails ad hauinches, 6f tution. Not surprisingly, even some Tndian consumers have started opting for meals avay from home on working days. The growing popularity of Delhi's Waiters on Wheels (WON), «supply agency delivering meals to peoples doot- ceps from 30 diffeent restaucants at the sane price as once would pay in the. estaurane, is an ex- ample of ladiz’ changidg food service landscape." High income and growing uehsnieaica hae also contebited fo a shift in the seaditional In- dian food habits. High-incorne urban dwellers are seeléing-variery in theit Choice of foods and are willing co spend more on intecaatinal cusive, including fast foods. Consequently, a growing num- bber:of doihestic far food outles,"home delivery, take-away restaurants, and-American restiacane chains, such as Kenticky Fried Chicken (KEC), FGI Friday’, Domiao’s Pizza, Pitza Hus, MeDonalds, sand Baskin Robbins, have opened ithe last few years. 7 NCAER (National Couneil of Applied Eoorioinic Research) survey report, Mich 9, 2004. Looking on the Bright Side: India's Eeonomy Is Revving Up,” The Economist, Febuary 21; 2004, p12 In a-widely cireulned cepore on the growth prospecis of BRIG (Brazil, Russa, India, China); Goldman Sachs predicted that over the nex« half century growth will slow sharply in the world’s six big rich countries and in Brazil, Rusia, and China. Bue tedia will convinue-to experince an ania average groweh of more than 5%, and by 2032 its GDP awl be bigger than Japan's. By 2050, India’s nadonal income per head in dollar terms will hve muliplied 35-fold. Goldwan Sachs, Global Econatnic Paper No 99: Dreaming with BRICs: [he Path t 2050, October 2003, hep usu gs.com insightresearch/ceportslteport6-hinl, Alsace the follow-up tepor by Goldman’ Sachs, Global Economic Paper No 112: The GB: Time for a Change, ane 2004, aps nw gs connfinsighileeseatcheportfeepore 15 hui "Tien Dyson, Robert Cassen, and Lecla Vistia; Twnety-Firse Century fudia: Populétion, Economy, Haman Development cid the Environment, Oxford University Press, 2004 Sce‘Addicupa Sengupta, “Living Up to the Choices Offered by the Free Market,” idia Abroad, August 29, 1997, p. 24. ‘Tbo103 . 3India’s Economic Liberalization The'effort of McDonald’ to enter India commeniced in earnest it the erly 1990s after ie successfully opened outlets’ in China.” Exhibit 4 provides some fagts about’ McDonalds enicy and. growth into Select countries, India's wide range 6F economic teformns in the 1990s, coupled with a potentially iaige consumier marker (wih 300 million consumers, alinost as big'as China); provided entough incentives Donald's fo enter into she Indiati marker. Fxetutives ac MeDinald’ were avtare of hidias deep suspicion of forcign companies. Afér all, lidias colonization by the British for over three centuries staited with the East India ‘Companys tade linkages. Not surplisiigly, afte its iidependente in 1947, Indian political leaders propounded vigorously the swdeshi mantra (pteference for nations product). Accordingly, they-pursued policies of economic nationalism in which heavy state interycition in cco rnomic matters and preferencé for domestic companies conciiied util the late 1980s. Indi (© cultural imperialism, the so-called Western cultural dornination ovec Indian values, eaditions rl giousbelief, customs, and food abies, made the entey of foreign tmultinational corporations (MNCS), pacticularly in the food induste, difficult. Uniti! Late 1980s; india continued to pursue a drigiste (atte contiol over cooriomig matters) and éantaire (sel€-sufleiens) development strategy. Under this strategy: public sector-led: economic growth ‘was given critical importance: Government control over the econoiny was maintained ‘didugh protec: tive tade policies! priée contra}; licensing, requirements for companiés,to-relocate existing files, establish nevi plants, ekpand: production, and introduce tiew technology or new product lines sere ‘onstiaints on the in-flow of foreign capital and iechuiglogy: and extensivexejlatory intervention on imatkeét activities. Companies were forced to impozt at the government-fixed exchange rate: The incfi- ‘ency of the public secior and the goverment’ policy to support los-making public firms by budgee coutlays and loans fiom nationalized banks led to 2 considerable slowing down of the Indian economy: Such seracegies produced a low economic groweh rate (the so-called Hindu rate of growth) of 3.596 between 1965 and 1980 By the late’ 1980s, India began to borrow heavily from both coinimtercial sources and the World Bank andl Asian Development Bank to finance its growing budger deficits. The major portion of the government's fiscal deficit was, incursed by its inability «0 coftibl theexpansion of public sector em- ployment, subsidies, military expenditure, and interest payménts:'By 1990, Indias economic sisuation was in a critical sage. In Juane.1991, India faced a sevexe balance of paymeitcriss as ies forcign exchange reserve plummeted to an all-time low of $1.2 billion, bately sufficient to pay for two weeks of vital iniports. Besides, by 1991 the central goveinonénes budget: deficits reached « record: high of 8.4% of GDP. The inflation eate, which for most of the 1970s and 1980s remained aca single digit, went upto 1796; external debe increésed from'$21 billion in 1980 to over $ 71 billion; and the debe-to-service ratio ingereased t0 an ynmartagenble 3296 of GDP? ‘ Tn response to this severe macroeconomic crisis, India’s newly formed government, under the leadership of Prine Miniscer Narasimha Rao.of the Congress (I) patt) introduced a teres of econoinic refortis designed to decrease goverment conceal in the écoriomy aid: move-towaed an-incteasingly ‘market-based economy; Exhibit 5 outlines sonie of the major palicy efoims of 1991: Indids economic - liberalization policies were desigied-to creace 2 miasker-friendly environment to atteact’MNCs and foreign direct iavestenent. "For baekground inforiiation about McDonald's and is histoty, see McDonald Behind the Archesby Joho. F. Love (New York: Bantarn Books, 1995); Grinding it Out: The Matting of McDonald's (Chicago; H. Regnery, 1977) writen by McDonald's Corporation founder Ray Krocwith Robert Anderson Big Mas: The Unauthorized Story of MeDonald': (New York: Dutton, 1976) by Max Boas and Steve Chain; and the MeDonald's Web sie Sco Monicek Singh Ahluwalia's commentary on India’s Reform, Calamibi Jour of Business 29:1 Sprit, 1994), 7, “ 4 fae "7B0103While « oumber of U:S:based fase food chains like KEC and Pi market in the eatly 1990s as reslt of the Indian, governnient’ lbetalizaion policies; McDonald’: did not enter the Indiait miarker until 1996. Instead, iespear about six years in pl ‘extensively 10° searching Indian conistimer testes, product develop rien, and supply chain arrangement before opening, ies firsc outlet in 1996, > MeDoriald’s Road Map for India Emphasis on Local Management ‘Fhuit cupid co the To ‘McDonald’ has given the'adage of “think global, act loca”'s conctete shape in India, The company’s localization seategy isclearly manifest in the critical afex of matagement. McDonalds decided to set up two joiic ventutes on: a 50:50 basis with, Encerview, New Delhi, December 28, 2003. ‘rpo10s ie 5when yoirgo into any'ounery, Very cleatlj, you have vo understand the cult; you Have co tiderstaiid hhow you intend to be relevant fo the consumer in that equntry- donte think any brand.n6 roatter how, big itis, can take the marker lightly. And { dink che biggést Mistake's when you think yout have a big brand and that everyone is overwhelmed by it. Because whatever the brand, i has to be televari ro the consuiner'of that coum”. , of Be By providing courtey-spécific relevant products—MabiarajaMac and about 7096 Indianization, of is products—MeDonald’s has been able to teiaumphoveritast great Frontier, Or has i, cally? 6 7 . ‘T0103,Exhibie Map of India ‘Teoi0s Exhibit? adie Socio: Beonomie Profile” GDP (O5$tilions, 2003) 58.2 GDP (PPP-USS billions, 2003) a) 30330 GDE pet capita (PPP USS, 2004) 3,100.0 GDP per apie annual grow te % (1999-2004) 68 Tatl Dpalation, 2005 (milions) 2,080.0 ‘anal: Population geoweh rate (6) 1999-2015. 13 Usbas Bopuilatin (a % of total, 1975) 213 Usbas Population (as 9 of sot, 2004) 28. Population under age of 15. (2% of tol, 2004) SLT expectancy a birth (2003) 630 ‘Adbule iericy rate (96 age 15 and above, 2003) 535 Population bela national povery line % (1999-2000) 290 Share of Inme or Consumption % (chest 2096) 2000 433 Share of iconic or Consumption % (poosest 20%) 1999 89 Soutc: Wiad Development Report 2003, The World Rank (New York: Oxoid Uni ‘sei Press, 2003)s Human Development Repoct 2003, UNDP (New York: Osfor Univers Pes, 2003); Economist Ineigence Uni, 2005,[Exhibir 3A Income Disiribution and Market Size in India (2004) Avccagt Animal ncoiiein USS Se of Houses ‘Nambetof Households (millions) ‘0~ 1,000 32 6A 1,001 - 2,600 40. 784 2001 = 3,000 3 263 3,001 — 5,500, 8 152. 55.500 Weed 134 eal ico i 1977 Sure: nia Economics; Meri Lach, Laffey exiaes,Lafleay Lud, Cards Inti ‘ha The Sucve of Puity, Word Resor Inecate, Washington, D.C. May 19, 2004, , ebay 24,2005; Exhibit 3B Middle-Class Income Distribution in India (Rs, 2001-2002 prices) ‘Total Number of Households (000) Income above 00000 (Middle High) sony teams 4500140909 Lowes) ‘om Hl a i oom ag ex ft ee Go Bl Bal sen fo 1 om 7 ‘Wbin ah A ssh4o0 agro 7 taco © 20%, Bistbuton Source: NCAER, March 2004, 18 ‘rRo103Exhibie 4 MeFactoids + Ray Kioe, founder‘of McDonald's Cotporation, opened ie fest McDonalds in 1955 in Des Plas, lindige : : + -MeDonala’s eth large plo fat Fd: secvice eal with moe that 30,000 esata: i120 counties srvig 47 million castes daily and mote tha. 15 milion employes worldivide.: “The fise McDonalds cestaicant outside of Nott Amecia opened in Casta Rica on December 28,1970. in Russa, McDonald’ opeied ies Gas restaurant on January 31, 1990. Asef one 2001, fehas opened 60 restaurant that county. : + MeDiall’s opeied it frst restaurant inthe People’s Republi of China (Shenzhen Special Peonomic Zone) on Octobt 8, 1990. i opened its outlet in Beijing in 1992. As of june:1999, ichas opened 235 urs in thar coun. * . “Thexe sre 164 McDonalds ta shite covineies in Afvex: South. Aca, gy afd Morocco. McDonalds opened ie firs rescaurane in Japan in’ 1971. As of September 30, 2001, Japan has 3°717 MeDoralds sestaurans + McDonalds opened its frst cestaucaue in Singapore i 1979.-As of Sepiembiee 30, 2001, Singapore hes 124 ‘McDonalds restaurants. © McDonalds operied i fist restaurant i India Yn 1996, As of Novertbet 2004, India has 58 McDionaks estauants + McDonalds opened its fre sstauavi in Pakistan 1998. As of September 30, 2001, Pakivtan has 18 MeDonalds restaurant. 7 Sows “Mls Shrugged” Fee Poli, Mayne 20 p20; Scns hkl "Mendin” Bie Tea, Nove 35, 200, ply fens Waco “Ching Mn ae” ae A, Magne 200, p. 120 ~ ‘TB0103 E 19ExhibieS Summary of Beonémic Reforms and Chaniges iv the Indian Economy (1991-93) TIndusuril Reform Aboliion of indus licensing Induce ening abolished forall but 1 stategc induces. aie, eenaes were reqiged noc only for ner ides, lui ao to make any change in the exissig ones Renova f casita Sveccipsciyexpatision Under Monopoly aid Restrictive Tiade Practices (MRTP) Act tage fans weré prevented foe expandiog thei exiting indusial capaci. This was remand Participation offorigafims in nie? projects” Automatic approval granted fc ptojecs involving Foch qty investmest up 65196 ia high pity indis such a8 vnsporeation, poierinfastructure elated, ec Privatation Lstof industie fetes for public seeor reduced fain < 17 0.6. Private Seto patticipatio is allowed in induses fon the reserved fit. : Price libration Prices of most conerole tds such a sec, petolen, dd | : eal liberalized: °° Capital Macket Reloren : Liberalization af foreign itvestment oteign Exchange Regulation Ace (FERA) was ameinded to 7 4 make i easier for foreign firms to take more tha 40% stake in Tein fens, Foceigfnstitucionalinéscos such as persion finds snd suru Funds were allowed o invest in Indian capil tmatkee afte rgiseering withthe independent authoriy ‘called Security and Rxchange Board of India (SEB) Access to plbial eptal markers Indise Bias wee allowed tose deb aid equity in global capital marke. Riipee convcribitty oncurcentaccount No longer necesaty io purchase raw materials and pial goods ac goveenivene-fied exchange rates ts Reform: 2 Redaction of inebine tax rate Corporate taxes loved Fath 65% co 459%. Reronal {came tk it educed 0 40% ind extxipion Sani eased # Abolition oF wealth ‘Wealth taxon all faancialases, including share, scutes, ‘bonds, and bank deposits abolished. ay Labor Maskét Retort * Exit policy No real progres. Companies with a workforce of ove 300 : _eaninor retreinch Workers withéut atithorization from the povernment Reduction of iif cule ‘Customs duces on raw maleials and finishes goods lowered from 110% co 65%'and en capital goods frets 110% to 2596. Requirement on impor licenses removed. Import duties on machinery for agriculruse, horticaleare, forestry, pouley, etc reduced fram 100% to 25%, Importation of corisumer goods remains resiicred 20 “ra0103“rH0103, Bai {TEN ALA CARTE, ve | Malasja Mac MeCihicken Burger | McChickei Binge with Cheese pio Bile Fish McBurger MeBiiger with Cheese MeVejgie Burger. MeVepric Busgex with Cheese Mehloo'Tikkt lurgee IMcAloo Tikki Burges with Cheese Salad Sandie PirexMcPuff Chien MeGaith Chicken, Mee wih Cheese Ext Cheese Beers Condiments HAPDY MEALS (with sgular dink and toy) Mebuirger isis Po Salad Sandwich Meloa Tikkd Chicken McGill VALUE MEALS (with wedges and regular drink) Medea Tiki Chicken Meal Salad Sandwich BigaPoh MEAT. COMBOS (with'medium fries and. medium disk) MeVergie | MeVeggie wit Cheese ‘Maharaja Mac MéChicken, itG McDonalds Mena in i + PRIES Fee large’ ‘Wedges BEVERAGES Regula Coke tings Coke Lage Coke Repay Fa Matin Eas gs Fae Rega Sprie etn Se as Spite McSHAKES Choose Seautbery Vavilla Mitel Wac 50% Cafe F Toned Mi DESSERTS SORT SERVE Vets Peneaprle ioc tge Safe See Cine Apple Ps 2Tshilie7 Household Expenditoes @o of otal), 1998-59 ‘mncatone ‘onus omy. ‘zon teomise se Sox: indi The Sracure if Peery, Wot Resource Isic, Washingon, D.C. May 19, 2004 Exhibic8 ‘The Big Mac Index Concept The Econom, a seekly news magative published inthe United Kingdom, iewipduced ies Big Mac Indextin 1986 to explain the concept of purchasing power patty (PPD). Given the consistency of Mc{onal’s Big Mc product actoss countries its pic is used by The Econom to calculate exchange rats adjusted for purchasing power for a satciple of counties. The idea of the Big Mac asa measure of purchasing power pacity is based on the Lat of One Price, according to which the exchange ate should adjust e equate prizes ofthe sam products between cosates. By eompating the price ata Big Mac in any cvo cities in dfleci coved exchange rate can-be really calculated chat would make the prices eqlal (Exhibit 9) Porexamnple as showa, elon), fa Big, Mac eoss U582.90'in the United Stats and 10.41 yuan in China; then the exchange rate should be 3.59 yuan per US. dolla, so that che sane Big Mac cost the saine in New York ard Sheinghil Caleudating the Big Mc PPP rate PPP Yoan/USS = Chirest price of « Big Mac in yuan divided by U.S. price ofa Big Mac in, USS ‘Yuan10-40 /'US§2.90 7 = 3.59 Yuat/USS, whick i the exchange cate chac will exis if thé Law of One Price holds exactly [The above xamle shes eclear thatthe calculation of purchasing power pase isbased on equal prices ia dk csuneies, eather than necessarily equal puchasing powes for consumes. Given tha the average per apta income in Chie ie 2004 was US35,225, while in the U.S. the average war US$34,770, ite cleae that [Chinese would nor hate che same purchasing powers the average American in that year le would costa Chinese consurner about 5 times as much sb a perentgeof hse income to buy a Big Mac, even ithe price were che same in bth counties. Noe suepesngy a Big Mac costing 1040 yuan in China may very wel ea taxuey good. In fac, in many counties, this is exactly the case Si: Ada fom Rain Gro ad Adi "hag “The Manager Gide ig Macs” anpubled rp, aly 2004, a a ‘TRo103Exhibit 9 — Big Mac Index Big Mac big Mag implied etal dollar Under(Tley pices in local“ .prccisin” DDB af exchange rate valuation agains . scurensy dallas thedallag-. -May2004°“thedallar (09) United Sexes. $290 2:50 = = = Argentins - 7 Peso 4.35 1a 158 | (294 49 Austeali’ AB325 227 youl 143 22 Brasil Real 3:39 a S86 317 al ARs 337 54 179 “6 Cs 39 233 110 137 "20 Peso 1401-5 5 28 483 643 B Yarn 104, 12g 82 9.59 826 “52 Grectifiep “Koruna 56.55, 213 195 266 ea DenmickDKF27.75, 446 957 622 54 Egyoe Bond 10.00 162 3.45 617 “aa: Buto area 274 328 1.06 120 HBS Hong Kong * HKS 12.01 34 “hid 7.80 “47 Hungary orn 531 232 183 21 13 Jodonesis Rupiah 16,200-° 1.77 5952 9097 38 Tapa ¥ 262 233 503 12 20 Malaysia MB 5.05 133 174 3.80 4 Mexico Peso 24.0Le 208 228 134 28 New Zealand NZ$435 265 150 164 3 Pes New Sl 8:99 231 3.10 350 oa Philippines.” - Peso 69.02 123 238 56.1 “3 Poland 2lory 6.29 163 27 3.86 “44 Russia Rouble 42.05 LG 145 29.0 30, Singspore "S83. 192 Lia 12 South Ais’. Rand 2.41 136 428 667 36 South Keres, Won 3,199 an 1,103 1176 6 Sweden SK=2987 3.96 103 7.58 436 Switeedand ,- SEe629 490 2.17 128 1 Taiwan NIW5.01 224 25.9 335 23 Thailand he 58.87 145 203 40.6 0 urkey irs $950;000° 258. §5862,069, 1331008 11 Vencauela. . ohge 4399 148 1,517 agra 49 I Rs 34.00, 075 7 453 7% Calculxing ove (onder) valuation: TED Yea USS » Tokyo pice oF «Big Mac in Yen divided by U.S, price ip USS'= Cen 262)(USS2.90) = 903. ‘Over (under) ation » The HBP exchinge eat pts the actu change tte divided bythe actual exchange ate = (00.3 ~112)/112 = 20% (hae ig, USS asco al by 2086 aginst the ener sto appreciate from 112/US8 6 90 yen/USS—to the eto ech Big Mac PEP) “ig Meisel ds is ple ig Mack ie Maca Mack ps give ie Souci Adapt fom Th Bamomit, May 29, 2004p. 71-72; and itaber Grose Advi E Tichoe, "The Manges Guide vo Big Mics sapablbed paper, Jah authors eaeiton, ‘reo. 7 2mw ~ chwlljacchvbee. Batter 8 Preaina frombyrartrDsiy, fm Crees EB argue atic. - Logie, Pie Sounce: heeled comfbusnes1999/sp1129%ma3 0g je 11 Indian Tood Preférences-— Vegetarian vs. Nonvegetarian vooeian Soune: "The Rediscovery of lai" Pndit Abroad, Jay 2, 1998. This reports based fon a decade long, nationwide eibaopraphic survey of Indian people, which was published ‘by Anthpological Sorveyofledia New Dell, Dceraber 1997, under the site "People of TBOLOSExhibie 12, MeD TBOL03