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. How does Fannie Mae (FNMA) make money?

    Fannie Mae is a government-sponsored enterprise (GSE) established in 1938 to expand the flow of mortgage money by creating ... Read Answer >>
  2. 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 >>
  3. 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 >>
  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 >>
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. 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.
  5. 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.
  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

    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.
  8. Trading

    4 Ways To Forecast Currency Changes

    Whether you are a business or a trader, having an exchange rate forecast to guide your decisions helps to minimize risks and maximize returns.
  9. Insights

    McDonald's to Sell Sauces in Canadian Stores

    McDonald's, in search of ways to grow its top line, is planning to sell Big Mac, Filet-O-Fish and McChicken sauces in Canada.
RELATED TERMS
  1. Big Mac PPP

    A survey done by The Economist that determines what a country's ...
  2. Farmer Mac - Federal Agricultural Mortgage Corporation - FAMC

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

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

    15-year, fixed-rate, pass-through securities offered by the Federal ...
  5. Freddie Mac - Federal Home Loan Mortgage Corp - FHLMC

    A stockholder-owned, government-sponsored enterprise (GSE) chartered ...
  6. Municipal Assistance Corporation - MAC

    A corporation created by the state of New York to aid New York ...
Hot Definitions
  1. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  4. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  5. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  6. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
Trading Center