Big Mac PPP

AAA

DEFINITION of 'Big Mac PPP'

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.

INVESTOPEDIA EXPLAINS '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. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. New York Dollar

    The buying power of a U.S. dollar in the city of New York. The ...
  3. Burgernomics

    An economics term made popular by the Big Mac Index published ...
  4. Purchasing Power

    1. The value of a currency expressed in terms of the amount of ...
  5. Fixed Exchange Rate

    A country's exchange rate regime under which the government or ...
  6. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by ...
Related Articles
  1. The Big Mac Index: Food For Thought
    Forex Education

    The Big Mac Index: Food For Thought

  2. Hamburger Economics: The Big Mac Index
    Fundamental Analysis

    Hamburger Economics: The Big Mac Index

  3. What is the Big Mac index?
    Investing

    What is the Big Mac index?

  4. The Government And Risk: A Love-Hate ...
    Insurance

    The Government And Risk: A Love-Hate ...

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center