The Big Mac Fantasy World: Economic Mispricing from Remarkable Discounts

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The Economist’s latest Big Mac Index (July 16, 2025) claims Taiwan’s currency is 56% undervalued because a Big Mac costs less there than in America. This analysis would be quite useful if economics were practiced in a magical realm where military protection, legal systems, and stable governance appear naturally—you know, like those convenient background details that somehow maintain themselves.

Back in the mundane world where trillion-dollar security infrastructures require actual funding, this framework turns out to be a bit flawed.

The Minor Detail We Overlooked

The analysis treats the entire Pacific security order as a complimentary service, thoughtfully provided by… well, someone. In this careful framework:

When currency analysis treats these minor services as invisible, we end up practicing a fascinating form of economics that systematically overlooks roughly $800 billion in annual operational expenses. One might call this a small oversight.

What Taiwan’s Currency is Actually Worth (When We Count Everything)

Taiwan spends a modest 2.4% of GDP on defense while enjoying the protection of the world’s largest military. Independent defense against China would require a slightly higher 10-15% of GDP—approximately $50-80 billion annually instead of the current $12 billion.

The Arithmetic That Changes Everything:

Factor in this trivial security subsidy, and Taiwan’s currency isn’t 56% undervalued—it’s substantially overvalued. The “inexpensive” Big Mac exists because someone else is covering the minor detail of civilization maintenance.

The Restaurant Critic Problem

Imagine a restaurant critic who rates establishments solely on food prices while completely ignoring that some restaurants get free rent, utilities, security, insurance, and legal protection while others pay market rates. When the rent-paying restaurant charges higher prices, our intrepid critic declares this “price manipulation” and suggests the free-rent establishment demonstrates superior “market efficiency.”

This critic would be considered either charmingly naive or professionally incompetent. Yet this is precisely the methodology being applied to entire economies.

The Equivalence Comedy

The fundamental cost differences are obvious to anyone familiar with both markets—from commercial real estate costs to labor markets to competitive environments. When basic operational realities get ignored and burgers in completely different economic systems get treated as equivalent products, we’re not conducting meaningful economic analysis. We’re essentially comparing the price of hamburgers in a subsidized cafeteria to those in a restaurant that pays its own bills, then expressing surprise at the difference.

A McDonald’s operating in Manhattan faces vastly different cost structures than one in Taipei, from rent and labor costs to regulatory requirements and competitive pressures. Treating these as identical economic conditions leads to… let’s call them “alternate explanations” of currency values.

Beyond Taiwan: The Pattern Recognition

Apply security-cost adjustments across the “undervalued” currencies, and a delightful pattern emerges:

South Korea: Claims 45% undervaluation, but independent defense would cost $150B annually (vs. current $50B). Adjusted status: Substantially overvalued.

Germany: Claims 25% undervaluation, but independent defense would cost $250B annually (vs. current $55B). Adjusted status: Significantly overvalued.

Japan: Claims 35% undervaluation, but independent defense would cost $200B annually (vs. current $50B). Adjusted status: Considerably overvalued.

Curious! Countries receiving massive security subsidies appear to have “competitive” currencies until we include the cost of services being provided for free. It’s almost as if complimentary things make other things seem cheaper.

The Framework’s Minor Limitations

This isn’t a small analytical oversight—it reveals systematic institutional blindness to rather significant operational realities. The analysis builds on the charming assumption that governance, security, and legal frameworks are cost-free background conditions rather than, say, the most expensive services that enable all economic activity.

This framework systematically misvalues currencies, misunderstands trade relationships, and provides policy advice based on models that treat trillion-dollar operational requirements as decorative details.

Academic Balance and Limitations (The Obligatory Fairness Section)

To be entirely fair, traditional currency analysis serves useful functions when comparing similar economic systems with comparable security arrangements. The Big Mac Index may provide insights for countries within similar security frameworks or when analyzing short-term currency fluctuations independent of those pesky defense considerations.

The security subsidy framework also has limitations—quantifying exact security costs is complex, and some countries may contribute non-monetary strategic value that’s difficult to measure. Taiwan, for instance, anchors the first island chain, providing substantial strategic positioning value that’s genuinely significant but hard to price precisely. Additionally, market forces beyond security considerations certainly influence currency values. We wouldn’t want to suggest that trillion-dollar military expenditures are the only thing affecting exchange rates.

However, ignoring these modest costs in any serious economic analysis represents what we might diplomatically call a “significant analytical gap” that somewhat undermines confident conclusions about currency “manipulation” and trade “imbalances.”

Real World Implications (When Theory Meets Reality)

When tariffs get criticized as “economically irrational,” this relies on an accounting framework that treats massive security provision as a delightful free lunch. Countries that have been enjoying these complimentary services are being asked to compensate through trade adjustments or direct costs—but this gets called “artificial market distortion.”

The artificial element, it turns out, is treating trillion-dollar security services as a natural background condition, like gravity or good weather.

Toward Better Analysis (A Constructive Suggestion)

A more useful approach might incorporate security service costs into international economic comparisons, similar to how we already adjust for purchasing power differences in other domains. This could include:

Rather than assuming security services materialize through spontaneous generation, economic analysis could acknowledge these as measurable, valuable services provided by specific actors at rather substantial cost.

Conclusion: The Big Mac Reality Check

The Big Mac Index reveals more about analytical frameworks than about currency values. We’ve created sophisticated mathematical analysis built on the assumption that the most fundamental and expensive aspects of economic life cost absolutely nothing—a minor detail that somehow escaped notice.

When trillion-dollar military infrastructures get treated as free natural resources (like sunshine or fresh air), conclusions about currency “manipulation” and trade “imbalances” become delightfully meaningless. The analysis systematically ignores the largest service exports in the global economy while confidently diagnosing market distortions with the certainty of someone who’s never heard of operational expenses.

The real question isn’t whether Taiwan’s currency is undervalued in a fantasy world where civilization maintains itself through pure economic theory—it’s whether analysis that systematically ignores operational reality provides useful guidance for understanding actual trade relationships in the actual world, where actual bills must be actually paid.

Perhaps it’s time for economic frameworks that acknowledge the modest detail that governance, security, and stability are expensive services with providers and beneficiaries—rather than cost-free background conditions that appear naturally, like morning dew or confidence in our own analysis.

Original article: Our Big Mac index will sadden America’s burger-lovers | Archive link

— Free to share, translate, use with attribution: D.T. Frankly (dtfrankly.com)

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