ONE CURRENCY, TWO MENUS

What Big Macs and Starbucks Lattes Reveal about Purchasing Power Parity,Local Costs, and Global Pricing in 2025 International Finance — Final Mini-Case Analysis Summer 2026 | 7 August 1

Executive Summary This report updates the Big Mac index for China, the United States, and Switzerland using The Economist’s July 2025 data, constructs a 2025 Starbucks Tall Caffè Latte index from documented standard-menu observations, and evaluates both product-based currency signals against 2025 GDP,GDP per capita, and average annual wages. The results are interpreted as diagnostic price comparisons rather than exchange-rate forecasts.

The Big Mac calculation identifies the Chinese yuan as 40.95% undervalued and the Swiss franc as 49.63% overvalued against the U.S. dollar. The Tall Latte calculation gives a much smaller 6.17% undervaluation signal for the yuan but a much larger 102.08% overvaluation signal for the franc. The disagreement across products shows that a one-product index contains both a currency component and a product-market component.

Among the three macro variables, GDP per capita best matches the Big Mac price pattern:

China is lowest, the United States is intermediate, and Switzerland is highest, with a descriptive Pearson correlation of 0.94. Average wages provide the most direct cost channel, but their cross-country spread is too compressed at the top to explain the full Swiss premium. GDP per capita also provides the closest fit for Starbucks, although the relationship is only moderate (Pearson r = 0.73) because China’s Tall Latte price lies unusually close to the U.S. price despite a much lower income level.

The central finding is a three-layer interpretation: observed menu prices reflect local non-tradable costs, multinational price-to-market and brand positioning, and a spot exchange rate shaped by financial and balance-of-payments forces. A new ‘brand-location wedge’—the local Starbucks-to-Big-Mac price ratio relative to the U.S.—is 1.59 in China and 1.35 in Switzerland. This exchange-rate-free measure shows that Starbucks carries a materially larger relative premium in those markets than in its home market.

1. Introduction

Purchasing power parity (PPP) begins with a simple proposition: once prices are converted into a common currency, an identical tradable good should sell for the same amount across efficient markets. The course lectures express the law of one price as P_US × S = P_foreign and derive an implied exchange rate from the ratio of local product prices. They also emphasize that international parity conditions are central to understanding multinational business even though they do not always hold exactly in observed markets (Song, 2026d).

The Big Mac and Starbucks examples are especially useful because they make the abstraction visible. Both products are standardized by multinational firms and are recognizable across borders.

Yet neither is a freely traded commodity. A customer cannot cheaply buy thousands of hamburgers or hot lattes in China and resell them in Switzerland. Their retail prices combine globally sourced inputs with local labor, rent, taxes, regulation, distribution, and brand strategy. They are therefore tests not only of currency valuation but also of the limits of the law of one price.

This report answers all eight examination questions. It first reproduces the 2025 Big Mac and Tall Latte tables and charts. It then compares those product-price patterns with GDP, GDP per capita, and average wages. Finally, it explains why absolute PPP fails in each market and develops two extensions: an exchange-rate-free brand-location wedge and an illustrative wage-affordability comparison.

2. Analytical Framework, Data, and Method

2.1 Course framework

The absolute version of PPP states that the spot exchange rate should equal the ratio of the price of a similar basket abroad to the price of that basket in the United States. For a single standardized product, the implied PPP exchange rate is:

Implied PPP (foreign currency per USD) = Local product price / U.S. product price The raw currency valuation is then calculated as:

Raw valuation (%) = [(Implied PPP / Actual exchange rate) − 1] × 100 A negative result means that the foreign currency appears undervalued against the dollar under that product standard; a positive result means overvaluation. This is the same logic used in the course’s Hamburger Standard example and The Economist’s Big Mac index.

2.2 Data construction

• Big Mac prices and market exchange rates: The Economist’s full Big Mac dataset, July 1,2025.

• Tall Latte prices: documented 2025 observations for a standard Tall Caffè Latte—USD 4.45 from a January 2025 licensed Starbucks menu in the United States, CNY 30 from an August 2025 Chinese market report, and CHF 7.20 from a Swiss menu-price aggregation updated in December 2025.

• GDP and GDP per capita: World Bank World Development Indicators, 2025, current U.S.

dollars.• Average annual wages: OECD series reported by Trading Economics for the United States and Switzerland; China’s National Bureau of Statistics average annual wage for employees in urban non-private units, converted at the July 2025 CNY/USD rate.

Unlike The Economist’s synchronized Big Mac dataset, Starbucks does not publish a single audited global price series. This report therefore applies a transparent representative-observation method: one standard Tall Caffè Latte price per country, all observed or published in 2025, with no promotional discount. The U.S. observation is from a licensed Starbucks Express location, the Chinese source reports the standard national-market price, and the Swiss source aggregates prices across 17 outlets. The observations are converted at the same July 1, 2025 exchange rates used in the Big Mac table. This approach satisfies the year requirement but is less perfectly harmonized than the Big Mac index, so the Starbucks results are interpreted with wider uncertainty.

The wage series are also not perfectly harmonized. The U.S. and Swiss observations follow the OECD average annual wage concept, while the Chinese figure covers urban non-private units. The ranking is robust to using the lower Chinese private-unit wage, but the exact affordability magnitudes should be treated as illustrative.

3. Updated Big Mac Index for 2025

Local Price Valuation Country Implied PPP Actual FX price in USD vs USD

25.50 4.24293 7.18515

China $3.55 -40.95%CNY CNY/USD CNY/USD United 1.00000 1.00000

6.01 USD $6.01 +0.00%

States USD/USD USD/USD

1.19800 0.80065

Switzerland 7.20 CHF $8.99 +49.63%CHF/USD CHF/USD Source note: The Economist Big Mac data, 1 July 2025. The U.S. is the reference country.

Figure 1. Big Mac raw under-/overvaluation, sorted from lowest to highest.

China’s Big Mac cost CNY 25.50, equivalent to $3.55 at the market exchange rate, compared with $6.01 in the United States. The implied PPP rate is CNY 4.24293 per dollar, far below the actual CNY 7.18515 rate; the yuan therefore appears 40.95% undervalued. Switzerland’s CHF 7.20 Big Mac cost $8.99. Its implied PPP rate of CHF 1.19800 per dollar exceeds the actual CHF

0.80065 rate, implying 49.63% overvaluation.

The ordering—China, United States, Switzerland—is economically intuitive for a product with a large non-tradable service component. Labor, retail space, utilities, and local distribution are cheaper in China and expensive in Switzerland. Nevertheless, it would be incorrect to interpret the 5

values as a mechanical forecast that the yuan must appreciate by 40.95% or the franc must depreciate by 49.63%. The course notes stress that PPP is more reliable as a very-long-run anchor than as a short-run exchange-rate model.

4. Starbucks Tall Latte Index

Price Valuation vs Country Local price Implied PPP Actual FX in USD USD

30.00 6.74157 7.18515

China $4.18 -6.17%CNY CNY/USD CNY/USD United 1.00000 1.00000

4.45 USD $4.45 +0.00%

States USD/USD USD/USD

1.61798 0.80065

Switzerland 7.20 CHF $8.99 +102.08%CHF/USD CHF/USD Source note: 2025 standard-menu observations. United States: Starbucks Express Lacava Café menu (January 2025), Tall Caffè Latte USD 4.45. China: Sina Finance report (4 August 2025), Tall/中杯 latte CNY 30. Switzerland: PriceListo aggregation updated 15 December 2025,Tall Caffè Latte CHF 7.20. USD conversions use the July 1, 2025 exchange rates in the Big Mac dataset.

Figure 2. Starbucks Tall Latte raw under-/overvaluation, sorted from lowest to highest.

The Starbucks result differs materially from the Big Mac result. A U.S. Tall Caffè Latte costs$4.45. The Chinese price of CNY 30 converts to $4.18, while the Swiss price of CHF 7.20 converts to $8.99. The implied Starbucks PPP rate is CNY 6.74157 per dollar for China and CHF 1.61798 6

per dollar for Switzerland. Relative to the market rates, this produces a mild 6.17% undervaluation signal for the yuan and a 102.08% overvaluation signal for the franc.

China is the crucial case. The yuan remains undervalued under both products, but the magnitude falls from 40.95% under the Big Mac standard to only 6.17% under the Starbucks standard—a 34.78-percentage-point narrowing. The difference is economically meaningful:

Starbucks historically sold a branded café experience in premium urban locations, and its CNY 30 menu price sits close to the U.S. dollar-equivalent price despite much lower Chinese wages and income. Strong local competition and consumer price sensitivity were visible in Starbucks China’s June 2025 decision to reduce prices on selected non-coffee and iced beverages, although the standard Caffè Latte used here was not one of the cited discounted items.

5. GDP, GDP per Capita, and Wage Rate in 2025

Country GDP ca G p D it P a per wa A g n e n ual Wage definition China$tn

1 9.498

$13,862.0 $18,015.07 urban non-private units States U nited $tn

3 0.770

$90,026.5 $86,977.14 OECD average annual wage Switzerland t$n 1.044$114,769.0 $92,285.06 OECD average annual wage Source note: GDP and GDP per capita: World Bank, current USD, 2025. U.S. and Swiss wages: OECD series via Trading Economics. China wage: National Bureau of Statistics, converted at CNY 7.18515/USD.

Figure 3. GDP in 2025, from lowest to highest.

Figure 4. GDP per capita in 2025, from lowest to highest.

Figure 5. Average annual wage in 2025, from lowest to highest.

Total GDP produces a very different ranking from either menu price: Switzerland is smallest,China is intermediate, and the United States is largest. Total output is therefore a poor proxy for the cost of a single consumer service. It mixes population size with productivity and says little about the local marginal cost of serving one customer.

GDP per capita and average wages both rank China below the United States and Switzerland.

These variables are more relevant because restaurant prices are intensive-margin prices: they depend on local purchasing power and factor costs, not on the aggregate size of the national economy. Switzerland’s per-capita income is the highest of the three, while its wage level is only modestly above the U.S. figure. That distinction will matter when comparing which variable better explains the Swiss Big Mac premium.

6. Which Macro Trend Best Matches the Big Mac Index?

Macro variable Pearson r Spearman ρGDP -0.657 -0.500 GDP per capita 0.942 1.000 9

Macro variable Pearson r Spearman ρAnnual wage 0.870 1.000 Source note: Descriptive correlations across only three countries; they illustrate pattern fit and are not inferential estimates.

GDP per capita matches the Big Mac index most closely. Its rank order is identical—China,United States, Switzerland—and its Pearson correlation with the Big Mac’s USD price is approximately 0.94. Average annual wages also have the same rank order, but the correlation is lower, approximately 0.87. Total GDP has the wrong ordering and a negative correlation.

Why does GDP per capita outperform wages even though wages are a direct restaurant cost?

The Big Mac price contains both a cost channel and a demand-side price-level channel. Wages influence labor-intensive preparation, service, cleaning, and management. GDP per capita additionally captures broader productivity and purchasing-power differences that are capitalized into rents, utilities, commercial services, and the price of non-tradables. This is consistent with the Balassa–Samuelson logic: high-productivity, high-income economies tend to have higher non-traded-goods prices. Switzerland’s unusually expensive retail environment is therefore better represented by per-capita income than by the relatively small wage gap between Switzerland and the United States.

The result does not imply that GDP per capita ‘causes’ the Big Mac price. With only three observations, correlations are descriptive. The stronger conclusion is structural: per-capita income and wages are relevant proxies for the local non-tradable component, whereas total GDP is not.

7. Which Macro Trend Best Matches the Starbucks Index?

Macro variable Pearson r Spearman ρGDP -0.907 -0.500 GDP per capita 0.726 1.000 Annual wage 0.596 1.000 Source note: Descriptive correlations across only three countries. The Starbucks observations are documented 2025 menu prices but are not a synchronized national statistical sample.

GDP per capita is again the closest of the three variables. It has the same China–United States–Switzerland ranking as the Tall Latte price and a descriptive Pearson correlation of approximately 10

0.73. Average annual wages also have the same rank order, but the linear fit is weaker,approximately 0.60. Total GDP has the wrong ordering and a strongly negative correlation.

The fit is meaningful but incomplete. Switzerland’s very high income and wage levels are consistent with its expensive latte, yet China and the United States have nearly identical dollar prices despite a large income gap. Starbucks prices a bundle of coffee, customization, store atmosphere, location, convenience, and brand identity. Product differentiation—identified in the multinational-enterprise lecture as a source of market imperfection—gives the firm discretion to segment markets. In China, premium urban sites and brand positioning can offset lower national wages; in the United States, network scale, mature supply chains, and intense competition can hold down the standard base price.

Thus the Starbucks index is less a pure currency thermometer than a hybrid measure of currency valuation, local service costs, and multinational pricing power. GDP per capita remains the best of the three available macro proxies, but the China–U.S. price compression shows why a product-market explanation is still necessary.

8. Why Absolute PPP Does Not Hold in the Big Mac Market

Absolute PPP requires more than product similarity. It requires conditions that force price convergence. Those conditions fail in the Big Mac market for at least six reasons.

1. No practical arbitrage. A hot hamburger is perishable, regulated as food, and costly to transport. The triangular-arbitrage logic discussed in class works for currencies because financial claims can be moved almost instantaneously; it does not work for cooked meals.

2. A high share of non-tradable inputs. Labor, rent, electricity, cleaning, local logistics, and retail services are purchased in the host economy. Their prices can differ persistently without creating cross-border arbitrage.

3. Taxes and regulation. Value-added taxes, sales taxes, food-safety rules, labor regulation,franchise arrangements, and zoning alter unit costs and final prices.

4. Local sourcing and menu adaptation. Although the product is standardized, ingredients,suppliers, portion rules, and operating procedures are not perfectly identical across markets.

5. Market structure and price-to-market. McDonald’s responds to local competition, consumer willingness to pay, promotional strategy, and franchise economics rather than mechanically translating a U.S. price at the spot rate.

6. The exchange rate is an asset price. The balance-of-payments lecture links exchange rates to current-account, capital-account, financial-account, interest-rate, and reserve forces. Capital flows, policy expectations, risk appetite, and safe-haven demand can move the spot rate far faster than restaurant prices adjust.

Incomplete exchange-rate pass-through connects these mechanisms. Even when a currency moves, multinational firms often absorb part of the change in margins or adjust prices gradually to protect market share. Therefore the local Big Mac price and the market exchange rate can remain separated for long periods.

9. Why Absolute PPP Also Does Not Hold in the Starbucks Market

The same basic frictions apply to Starbucks, but the composition of the product is different.

Coffee beans are internationally traded, yet the bean is only one input into a prepared Tall Latte.

Milk, labor, rent, equipment, store design, digital ordering, loyalty benefits, and the ’third place’experience are local or market-specific. A globally traded input therefore does not make the final beverage globally tradable.

Starbucks also has greater scope for product differentiation. Consumers may treat the café as an affordable daily convenience in the United States, a premium international brand in China, and an expensive service in high-cost Switzerland. This permits market segmentation. The firm may choose a price that maximizes local profit, supports a desired brand position, or balances traffic and margin, even when the resulting implied PPP rate diverges sharply from the market exchange rate.

The Starbucks index is also more sensitive to measurement. Prices vary by city, store format,delivery channel, tax inclusion, and promotions. The Big Mac dataset is collected specifically for an established index; the Tall Latte compilation draws on multiple public menu sources. That does not make the comparison useless, but it requires wider uncertainty bands and more cautious interpretation.

10. Comparing the Two Markets: From PPP Gap to Brand-Location Wedge

Figure 6. The same currencies produce different signals under different products.

Both products reject absolute PPP, but they reject it by different magnitudes. The Big Mac pattern broadly follows local income and non-tradable costs. The Starbucks pattern adds a larger brand, location, and market-segmentation component. In China, Starbucks reduces the apparent undervaluation from 40.95% to 6.17%; in Switzerland, it increases the apparent overvaluation from 49.63% to 102.08%.

To separate market positioning from the exchange rate, define a brand-location wedge as the local Tall Latte price divided by the local Big Mac price, normalized by the same ratio in the United States:

Wedgei = [(Latte price / Big Mac price)i] / [(Latte price / Big Mac price)US]Because both prices in the numerator use the same local currency, the exchange rate cancels.

The measure therefore highlights product-specific positioning within each country.

Figure 7. Exchange-rate-free brand-location wedge (United States = 1.00).

Country Latte / Big Mac Relative to U.S.pre R m e i l u a m tiv e United States 0.740 1.00x +0.0%China 1.176 1.59x +58.9%Switzerland 1.000 1.35x +35.1%The wedge is 1.59 in China: the Starbucks-to-Big-Mac price ratio is about 58.9% higher than in the United States. Switzerland’s wedge is 1.35, about 35.1% higher. Because the exchange rate cancels, these values isolate the relative market positioning of Starbucks against another multinational restaurant product rather than offering a second estimate of the currency alone.

Figure 8. Illustrative affordability using gross average annual wages.

The affordability calculation reinforces the same conclusion. One average annual wage buys approximately 4,315 Tall Lattes in China, 19,545 in the United States, and 10,262 in Switzerland.

Although this is a gross-wage rather than disposable-income measure, Starbucks is exceptionally expensive relative to Chinese earnings. The Tall Latte is more expensive than a Big Mac in China,cheaper in the United States, and equal in local menu price in Switzerland; those within-country comparisons cannot be explained by the exchange rate.

11. An Integrated International-Finance Interpretation

The two indices can be understood through a three-layer decomposition. First, a local-cost and income layer raises the prices of labor-intensive non-tradables in high-income economies. This layer explains much of the China–United States–Switzerland Big Mac ordering. Second, a multinational pricing layer reflects economies of scale, product differentiation, competitive intensity,local demand elasticity, and strategic price-to-market. This layer is especially large for Starbucks.

Third, a financial exchange-rate layer reflects the balance of payments, interest differentials, capital 15

flows, monetary policy, expectations, and risk. A menu price cannot fully summarize this asset-market layer.

The Swiss franc illustrates the interaction of all three layers. Switzerland’s high income and wages rationalize expensive restaurant services, while safe-haven portfolio demand can support the franc’s market value. The same CHF 7.20 local price for a Tall Latte and a Big Mac nevertheless yields different index values because the U.S. benchmarks differ: $4.45 for the latte and $6.01 for the Big Mac. China illustrates the multinational-pricing layer: a lower general price level depresses the Big Mac price, while Starbucks’ premium positioning raises the latte price close to its U.S.

equivalent.The practical lesson for multinational financial management is that currency exposure and pricing exposure must be separated. A firm cannot infer the correct transfer price, retail price, or hedging policy from PPP alone. It must understand local costs and demand, the competitive environment, the pass-through strategy, and the financial determinants of the exchange rate.

12. Limitations and Robustness

• Only three countries are examined, as required by the assignment. Correlations therefore describe patterns but cannot support statistical inference.

• The Big Mac observations are a dated July 2025 snapshot; changing the month can alter prices and exchange rates.

• The Tall Latte observations are genuinely dated to 2025, but they are not perfectly harmonized: the U.S. price is from one licensed location, the Chinese price is a reported market price, and the Swiss figure is an outlet aggregation. Store format, city, tax treatment, and delivery mark-ups may differ.

• The Chinese wage definition differs from the OECD wage concept used for the United States and Switzerland. The rank ordering remains unchanged under plausible alternative Chinese wage measures.

• Average wages are gross and do not capture taxes, household composition, working hours, or disposable income. The affordability section is illustrative.

• A product-based index identifies relative price gaps; it does not establish the equilibrium exchange rate or predict the timing of currency adjustment.

13. Conclusion

The 2025 Big Mac index suggests that the Chinese yuan is 40.95% undervalued and the Swiss franc 49.63% overvalued against the U.S. dollar. The 2025 Tall Latte index gives a much smaller 6.17% undervaluation for the yuan and a much larger 102.08% overvaluation for the franc. GDP per capita best matches both product-price patterns, with wages providing a direct supporting cost mechanism. Starbucks still requires an additional explanation based on product differentiation,urban location, and premium market positioning, especially because the Chinese and U.S. dollar prices are close despite very different incomes.

Absolute PPP fails in both markets because neither prepared food nor café service is freely tradable, local non-tradable costs differ, taxes and regulation vary, exchange-rate pass-through is incomplete, and the spot rate is determined by financial as well as goods-market forces. Starbucks departs further from PPP because its product bundle contains a larger experiential and brand component and because its international pricing is more strongly segmented.

The most important conclusion is methodological. A product index is not a neutral window onto a currency; it is a joint outcome of the currency and the product market. Comparing two products in the same countries exposes that hidden joint determination. The brand-location wedge formalizes the insight: China’s relative Starbucks premium is about 59% above the U.S. benchmark and Switzerland’s is about 35% above it after the exchange rate is removed. The disagreement between the Big Mac and Starbucks indices is therefore not a weakness of the case study. It is its most valuable international-finance result.

References National Bureau of Statistics of China. (2026). Average annual wages of employees in urban units in 2025.

https://www.stats.gov.cn/english/PressRelease/202605/t20260518_1963740.html OECD. (2026). Average annual wages: Indicator definition and methodology.

https://www.oecd.org/en/data/indicators/average-annual-wages.html PriceListo. (2025, December 15). Starbucks menu prices in Switzerland: Caffè Latte (Tall), CHF

7.20. https://ch.pricelisto.com/menu-prices/starbucks-ch

Sina Finance. (2025, August 4). Starbucks China business and pricing: Tall latte, CNY 30.

https://cj.sina.com.cn/articles/view/1747383115/6826f34b020029lp8 Starbucks Express Lacava Café. (2025). Starbucks menu 2025–2026: Tall Caffè Latte, USD 4.45. https://media-acc.sodexomyway.net/web/en-us/media/StarbucksMenu2025-2026_tcm17-77621.pdf Reuters. (2025, June 9). Starbucks to lower prices in China as competition heats up.

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https://github.com/TheEconomist/big-mac-data The Economist. (2025). Big Mac full index CSV. https://raw.githubusercontent.com/TheEconomist/big-mac-data/master/output-data/big-mac-full-index.csv Trading Economics. (2026). Switzerland average annual wages.

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https://data.worldbank.org/indicator/NY.GDP.PCAP.CD 18

Appendix A. Calculation Audit Trail The following compact table provides the core arithmetic used in the report. Values may differ by the last decimal because displayed figures are rounded after calculations.

BM BM BM Latte Latte Latte Country FX local PPP val. USD PPP val.

25.5 7.1851 -

China 4.24293 4.18 6.74157 -6.17%

0 5 40.95%

1.0000 +0.00 +0.00

U.S. 6.01 1.00000 4.45 1.00000

0 % %

0.8006 +49.6 +102.0

Switz. 7.20 1.19800 8.99 1.61798

5 3% 8%

Source note: BM = Big Mac. PPP and FX are quoted as local currency units per U.S. dollar.