A:

The Big Mac index, also known as Big Mac PPP, is a survey done by The Economist magazine that is used to measure the purchasing power parity (PPP) between nations, using the price of a Big Mac as the benchmark. Using the idea of PPP from economics, any changes in exchange rates between nations would be seen in the change in price of a basket of goods which remains constant across borders. The Big Mac index suggests that, in theory, changes in exchange rates between currencies should affect the price that consumers pay for a Big Mac in a particular nation, replacing the "basket" with the popular hamburger.

For example, if the price of a Big Mac is $4.00 in the U.S. as compared to 2.5 pounds sterling in Britain, we would expect that the exchange rate would be 1.60 (4/2.5 = 1.60). If the exchange rate of dollars to pounds is any greater, the Big Mac Index would state that the pound was over-valued, any lower and it would be under-valued.

The index is imperfect at best. First, the Big Mac's price is decided by the McDonalds corporation and can greatly affect the Big Mac index. Also, the Big Mac differs across the world in size, ingredients and availability. That being said, the index is meant to be light-hearted and is a great example of PPP and is used by many schools and universities to teach students about PPP. (To learn more, read Hamburger Economics: The Big Mac Index.)

This question was answered by Lovey Grewall.

RELATED FAQS
  1. What are the nations with the highest PPP (purchasing power parity) with respect ...

    Learn which nations have the highest PPP with respect to the U.S. while reviewing the differences of calculating GDP in market ... Read Answer >>
  2. How does a decline in housing prices affect the banking sector?

    Learn about the affects on banks when housing prices go down, including loan delinquency rates, mortgage foreclosures, and ... Read Answer >>
  3. What does it mean when someone refers to the "Big Three" automobile sector?

    Learn which companies make up the Big Three. Learn what role the Big Three plays in the American economy, from bailouts to ... Read Answer >>
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
  5. What country has the wealthiest overall population?

    Find out which country has the wealthiest overall population, based on per capita income. Discover how this wealth was created ... Read Answer >>
Related Articles
  1. Insights

    What Is Purchasing Power Parity? (PPP)

    Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a market "basket of goods" approach.
  2. Investing

    Hamburger Economics: The Big Mac Index

    In theory, PPP stands up much better than it does in reality. Find out how to evaluate currencies according to the price of a Big Mac.
  3. Insights

    McDonald's is Test-Selling Its New Sriracha Big Mac (MCD)

    Could the Sriracha Big Mac translate into hotter sales?
  4. Investing

    Boston Invaded by Automated Burger Machine

    With U.S. comps sales sagging again, McDonald's is pushing its new Big Macs with a free burger ATM.
  5. Trading

    3 Ways To Forecast Currency Changes

    Forecasting exchange rates can help minimize risks and maximize returns. Here are three popular methods for forecasting exchange rates.
  6. Insights

    Purchasing Power Parity (PPP)

    Purchasing Power Parity (PPP) compares different countries' currencies through a market "basket of goods" approach. Two currencies are in PPP when a market basket of goods (taking into account ...
  7. Investing

    Fannie Mae and Freddie Mac, Boon Or Boom?

    These two companies are crucial to the mortgage market, but are they ticking timebombs?
  8. Investing

    Will McDonald's Sell Big Mac Sauce by the Bottle?

    While Aussies had a brief opportunity back to purchase bottles of McDonald's (NYSE: MCD) Big Mac "special sauce" in January, a recent trademark application filing by the burger chain hints at ...
  9. Investing

    IBM Makes Largest Ever Deployment Of Macs (IBM, AAPL)

    The Armonk company plans to install 100000 Macs on its campuses by the end of this year to save on costs.
RELATED TERMS
  1. Big Four (or Big Five, Big Six, Big Eight)

    The largest accounting firms in the United States as measured ...
  2. Freddie Mac - Federal Home Loan Mortgage Corp - FHLMC

    A stockholder-owned, government-sponsored enterprise (GSE) chartered ...
  3. Agency Swap Program

    A form of securitization whereby single-family residential mortgages ...
  4. Federal Housing Finance Agency - FHFA

    A U.S. government agency created by the Housing and Economic ...
  5. Conforming Loan Limit

    The limit on the size of a mortgage which Fannie Mae and Freddie ...
  6. Maximum Loan Amount

    Describes the maximum amount that a borrower can borrow. The ...
Hot Definitions
  1. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  2. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  3. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  4. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  5. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center