The Big Mac Index: A delicious indicator
The Big Mac Index was written by Pam Woodall in The Economist in 1986. The index, also known as Burgernomics, is published every spring by The Economist. According to the magazine, it serves as a lighthearted guide to whether currencies are at their correct level while seeking to make exchange-rate theory a bit more digestible. The index is based on the theory of purchasing power parity (PPP).
To calculate PPP, the price of a basket of goods or services is compared between two countries; however, to calculate The Big Mac Index, our basket consists of only one item: The McDonalds Big Mac, sold almost all over the world. The price of a Big Mac in terms of a nation’s currency is divided by the price of the same burger in another country’s currency. The result is then compared according to the actual exchange rate:
If the resulting number is lower than the actual exchange rate, then the first currency is undervalued, and vice versa; if it is higher, then the first currency is overvalued.
Nevertheless, The Big Mac Index has some flaws as well. For instance, the size and ingredients of a Big Mac may vary from one country to another. Moreover, the price of the Big Mac is determined by the McDonalds, and this can affect the index to a great extent. Although such loopholes are associated with this approach, the PPP estimates by this index are very similar to the results calculated by more scientific tools.
Other similar indices have been introduced as well. For example, the iPod Index, compares the price of a certain model of iPod between two countries.
The Big Mac itself was first introduced in the United States in 1969.