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 lowest PPP (purchasing power parity) with respect to ...

    Learn how purchasing power parity (PPP) is used to compare the price of goods between countries, and which countries have ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. What is the relationship between the PPI and the CPI?

    First, let's take a look at what these two acronyms mean: the PPI is the producer price index and the CPI is the consumer ... Read Answer >>
  5. Is it possible to invest in an index?

    First, let's review the definition of an index. An index is essentially an imaginary portfolio of securities representing ... 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

    Big Mac Index

    The Big Mac Index is an informal way to gauge the values of currencies around the world against the U.S. dollar.
  4. Insights

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

    Could the Sriracha Big Mac translate into hotter sales?
  5. Insights

    Investopedia Millennials Try a Big Mac for the First Time

    Only one in five millennials has had a Big Mac. We held an office-wide taste test to hear what the other four had to say.
  6. Investing

    McDonald's Makes 2 Big Changes to the Big Mac

    Despite five straight quarters of higher comparable-store sales growth, McDonald's (NYSE: MCD) is having trouble attracting more customers to its restaurants. The gains it's made in the important ...
  7. 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.
  8. 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 ...
  9. Investing

    McDonald's Testing Changes to the Iconic Big Mac

    Underscoring its promise to put everything on its menu under the microscope, even core items like the Big Mac that have been virtually unchanged since their introduction almost 50 years ago, ...
  10. Investing

    Fast Food at McDonald's Just Got a Little Slower (MCD, SHAK)

    The fast food giant's “Create Your Own Taste” is out, but it’s being replaced.
RELATED TERMS
  1. Big Mac PPP

    A survey done by The Economist that determines what a country's ...
  2. Burgernomics

    An economics term made popular by the Big Mac Index published ...
  3. Farmer Mac - Federal Agricultural Mortgage Corporation - FAMC

    A publicly traded, shareholder-owned corporation that was federally ...
  4. Mortgage Participation Certificate

    A type of security that groups together Freddie Mac conventional ...
  5. Gnomes

    15-year, fixed-rate, pass-through securities offered by the Federal ...
  6. Big Four (or Big Five, Big Six, Big Eight)

    The largest accounting firms in the United States as measured ...
Hot Definitions
  1. Quadruple Witching

    The expiration date of various stock index futures, stock index options, stock options and single stock futures. All stock ...
  2. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  3. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  4. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  5. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  6. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
Trading Center