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.

  1. How does the balance of payments impact currency exchange rates?

    A change in a country's balance of payments can cause fluctuations in the exchange rate between its currency and foreign ... Read Full Answer >>
  2. How do I use Weighted Alpha to create a forex trading strategy?

    In foreign exchange or conventional security markets, weighted alpha is designed to help discriminate between different instruments ... Read Full Answer >>
  3. What are common strategies traders implement when identifying a Bearish Engulfing ...

    Technical traders in the forex market are always looking to anticipate shifts in price patterns, hoping to time their trades ... Read Full Answer >>
  4. What do the terms weak dollar and strong dollar mean?

    The two terms, weak dollar and strong dollar, are generalizations used in the foreign exchange market to describe the relative ... Read Full Answer >>
  5. What is the correlation between American stock prices and the value of the U.S. dollar?

    The correlation between any two variables (or sets of variables) summarizes a relationship, whether or not there is any real-world ... Read Full Answer >>
  6. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ... Read Full Answer >>
Related Articles
  1. Forex Fundamentals

    3 Reasons The Mexican Peso Is So Liquid

    Mexico's vast petroleum reserves and close proximity to the United States add considerable liquidity to the Mexican peso.
  2. Forex Fundamentals

    These Are The Best Hours To Trade the U.S. Dollar

    The best times to trade USD currency pairs are centered before and after economic releases in in the U.S. and cross-venues.
  3. Forex Strategies

    Two Great Currencies To Profit From Oil Volatility

    U.S. dollar crosses with Canadian and Australian dollars offer easy access to crude oil trends due to their tight correlation with energy futures.
  4. Investing Basics

    5 Tips For Investing In IPOs

    It’s not easy to profit from IPO​s, but the money is there.
  5. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  6. Investing Basics

    Explaining Interest Rate Parity

    Interest rate parity exists when the expected nominal rates are the same for both domestic and foreign assets.
  7. Investing Basics

    Understanding Arbitrage Pricing Theory

    Investors use the arbitrage pricing theory to identify an asset that’s incorrectly priced.
  8. Forex

    Understanding Currency Carry Trade

    A currency carry trade is a long-term investment strategy used primarily by large institutional investors. The purpose is to make a profit over time from differences in interest rates between ...
  9. Forex Fundamentals

    What Would Have To Happen For The Iraqi Dinar To Become A Stable Investment?

    What factors would cause price changes in the controversial Iraqi dinar?
  10. Forex Fundamentals

    Is the Iraqi Dinar Investment a Wise Investment?

    The Iraqi dinar is a hot investment--but is it a wise one?
  1. Open Position Ratio

    The percentage of open positions held for major currency pairs ...
  2. Bear Squeeze

    A change in market conditions that forces pessimistic investors ...
  3. Bear Straddle

    A speculative options trading strategy that consists of purchasing ...
  4. Cross-Currency Settlement Risk

    A type of settlement risk in which a party involved in a foreign ...
  5. Joint Float

    Two or more countries agreeing to keep their currencies at a ...
  6. Optimum Currency Area Theory

    A currency thoery based on geographical area that adopts a fixed ...

You May Also Like

Hot Definitions
  1. Ex Works (EXW)

    An international trade term requiring the seller to make goods ready for pickup at his or her own place of business. All ...
  2. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. LOIs are usually not legally binding in their entirety. ...
  3. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  4. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  5. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  6. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!