Big Mac Index

Big Mac Index

Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
The Big Mac Index is published by The Economist as an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which marketexchange rates result in goods costing the same in different countries. It “seeks to make exchange-rate theory a bit more digestible”.[1]
The Big Mac index was introduced in The Economist in September 1986 by Pam Woodall as a semi-humorous illustration and has been published by that paper annually since then. The index also gave rise to the word burgernomics.[2]
UBS Wealth Management Research has expanded the idea of the Big Mac index to include the amount of time that an average worker in a given country must work to earn enough to buy a Big Mac. The working-time based Big Mac index might give a more realistic view of the purchasing power of the average worker, as it takes into account more factors, such as local wages.[3]
One suggested method of predicting exchange rate movements is that the rate between two currencies should naturally adjust so that a sample basket of goods and services should cost the same in both currencies (PPP). In the Big Mac index, the basket in question is a single Big Mac burger as sold by the McDonald’s fast food restaurant chain. The Big Mac was chosen because it is available to a common specification in many countries around the world as local McDonald’s franchisees at least in theory have significant responsibility for negotiating input prices. For these reasons, the index enables a comparison between many countries’ currencies.