Big Mac PPP

What is the 'Big Mac PPP'

The Big Mac PPP is a survey done by The Economist that determines what a country's exchange rate would have to be for a Big Mac in that country to cost the same as it does in the United States. Purchase power parity (PPP) is the theory that currencies adjust according to changes in their purchasing power. With the Big Mac PPP, purchasing power is reflected by the price of a McDonald's Big Mac in a particular country. The measure gives an impression of how overvalued or undervalued a currency is.

BREAKING DOWN 'Big Mac PPP'

The calculation of the Big Mac PPP-adjusted exchange rate looks at the price of a Big Mac in a given country and divides it by the price of a U.S. Big Mac. Let's say that we are looking at the Big Mac in China. If a Chinese Big Mac is 10.41 renminbi (RMB) and the U.S. price is $2.90, then - according to PPP - the exchange rate should be 3.59 RMB for US$1. However, if the RMB was actually trading in the currency market at 8.27 RMB for US$1, the Big Mac PPP would suggest that the RMB is undervalued.

RELATED TERMS
  1. Farmer Mac - Federal Agricultural ...

    A publicly traded, shareholder-owned corporation that was federally ...
  2. Gnomes

    15-year, fixed-rate, pass-through securities offered by the Federal ...
  3. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  4. Big Four (or Big Five, Big Six, ...

    The largest accounting firms in the United States as measured ...
  5. Conforming Loan

    A mortgage that is equal to or less than the dollar amount established ...
  6. Message Authentication Code - MAC

    A security code that is typed in by the user of a computer to ...
Related Articles
  1. Markets

    Macroeconomics: Currency

    By Stephen Simpson For citizens of different countries to conduct trade, they have to buy and sell each other's currencies. The price of a nation's currency, expressed as an amount of a second ...
  2. Personal Finance

    Fannie Mae and Freddie Mac, Boon Or Boom?

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

    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.
  4. Trading

    Chinese Yuan: A 360 Degree Analysis (CNY)

    The Chinese yuan (Renminbi) is the currency of China, with currency code CNY and currency symbol ¥. In early 2014, the CNY was the seventh most traded currency in the world.
  5. Markets

    Key Takeaways From Baidu's Q3 Earnings (BIDU, QIHU)

    Baidu (NASDAQ: BIDU), the largest search engine in China, recently reported solid third quarter earnings. Revenue rose 36% annually to RMB 18.38 billion ($2.89 billion), meeting analyst expectations. ...
  6. Markets

    What to Expect From Big Lot's Earnings (BIG)

    With BIG shares up 8% so far on the year, including 6% gains in the past month, some investors have made up their minds.
  7. Trading

    Yuan vs. RMB: Understanding the Difference

    Is renminbi or yuan the right name for Chinese currency—and more importantly, what are the issues revolving around it today?
  8. Markets

    Benefits From A Tango Of China-US Trade and Debt

    China has been accumulating US debt for many decades. Here's why it continues to do so, and the risks and benefits of this for both the US and China.
  9. Investing

    Explaining Fixed Exchange Rates

    A government using a fixed exchange rate has linked the value of its currency to the value of another country’s currency, or the price of gold.
  10. Entrepreneurship & Small Business

    This Retailer Just Raised Guidance (BIG)

    Not many retailers are raising guidance. This is one exception.
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. How do I apply for a loan through a government agency?

    I want to apply for a home loan with Freddie Mac or Fannie Mae. I am not having much luck. Where do I apply?  ... Read Answer >>
  3. 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 >>
  4. How do changes in national interest rates affect a currency's value and exchange ...

    Understand the role that changes in interest rates can play in determining the value and foreign exchange rate of a country's ... Read Answer >>
  5. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
  6. How does a capital account illustrate the strength of investment markets for a country?

    Understand what a country's capital account is and how the capital account level can be used to gauge the strength of investment ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center