About the Big Mac Index
A lighthearted guide to currency valuation that has become a global standard for measuring purchasing power parity.
What is the Big Mac Index?
The Big Mac Index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their "correct" level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries.
Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies.
Why a Big Mac?
- •Sold in nearly every country with minimal variations
- •Contains a diverse range of ingredients (bread, meat, cheese, vegetables)
- •Involves costs of labor, rent, raw materials, and transportation
- •Represents a mini-basket of goods and services
How It Works
The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency).
Example Calculation:
Big Mac price in US: $5.69
Big Mac price in UK: £3.49
Implied exchange rate: 3.49/5.69 = 0.613
Actual exchange rate: 0.79
→ Pound is overvalued by 29%
This comparison gives you an idea of whether a currency is under or overvalued relative to another. If a Big Mac costs less in Country A than in Country B at market exchange rates, Country A's currency is considered undervalued.
Limitations & Considerations
While the Big Mac Index is widely cited and surprisingly accurate, it's important to understand its limitations:
GDP Variations
Labor costs are lower in poorer countries, making the index less reliable for developing economies.
Trade Barriers
Tariffs, taxes, and trade restrictions can affect local prices beyond currency valuations.
Local Preferences
Cultural differences and local tastes may affect demand and pricing strategies.
Non-Tradable Goods
Services like rent and labor cannot be traded across borders, affecting price equilibrium.
Quick Facts
- Invented
- 1986
- Created by
- The Economist
- Countries Tracked
- 50+
- Update Frequency
- Bi-annually
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Frequently Asked Questions
How accurate is the Big Mac Index?▼
Academic studies have shown that the Big Mac Index has had reasonable accuracy in tracking long-term exchange rate movements. While it's not meant to be a precise predictor, it often identifies currencies that are substantially over or undervalued.
Why do some countries not appear in the index?▼
Not all countries have McDonald's restaurants. Additionally, in some countries like India, the Big Mac is not sold due to religious dietary restrictions. In such cases, alternative products like the Maharaja Mac are used.
How often is the data updated?▼
The Economist typically updates the Big Mac Index twice a year, in January and July. Our platform aggregates this data along with historical information to provide comprehensive insights.