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 important a metric is PPP (purchasing power parity?)

    Find out why calculations and comparisons of the purchasing power parity (PPP) in different countries can have a real impact ... Read Answer >>
  4. Why is PPP (purchasing power parity) controversial?

    Find out why economists disagree about the conceptual validity of the theory of purchasing power parity (PPP) to describe ... Read Answer >>
  5. What is the relationship between nominal GDP and PPP (purchasing power parity)?

    Examine the relationship between final goods production, income, gross domestic product, purchasing power parity and the ... Read Answer >>
Related Articles
  1. Trading

    The Big Mac Index: Food For Thought

    You may have heard of this mouth-watering method of evaluating currencies, but make sure you know the whole story.
  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. 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.
  5. 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 ...
  6. 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, ...
  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. Insights

    How Fannie Mae And Freddie Mac Were Saved

    These mortgage giants had to be put under government conservatorship, driving home the gravity of the subprime crisis.
  9. Insights

    Fannie Mae, Freddie Mac And The Credit Crisis Of 2008

    Is the U.S. Congress' failure to rein in these mortgage giants to blame for the financial fallout?
  10. 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.
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. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center