Friday, October 07, 2005

Something I'd like to ask an economist

Just in case there is one right now reading this post or someone who also thought about this: There is an annual index compiled by The Economist which basically tells how much a Big Mac costs in dollars on each country. That is, you take the cost for it on the local currency and then convert that amount to USD.

My understanding is that the variation from one contry to the other is explained by how expensive it is to produce and serve a Big Mac on each country. That reflects how expensive is labour, ingredients, etc. OK. So I live in Brazil, and according to that index, the Big Mac on the USA is 28% more expensive probably due to what I mentioned, but how can we explain the absurd discrepancy between how much the engineering consultancy company I work for in Rio de Janeiro can charge for its services to local customers and one doing the exact same thing would charge if it was based in Seattle ? I'm sure the difference is well above 28%, and could be estimated even higher if taking into account my salary here and what I'd make working abroad.

One conclusion I could arrive is that the discrepancy gets bigger as we move up in the cost chain of services, but why ? Is my conclusion correct ?

I thought about it after reading some chapters from Freakonomics. I got a bit interested about this economic phenomenon and wondered if anyone out there know of any other good book discussing this topic in laymen language.

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