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 McDonald's Big Mac as the benchmark. Taking 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.
Big Mac Index in Practice
For example, if the price of a Big Mac is $4.00 in the U.S. as compared to £2.5 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 overvalued; any lower and it would be undervalued.
The index is imperfect at best. First, the Big Mac's price is decided by the McDonald’s Corp. (MCD) 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. It's used by many schools and universities to teach students about PPP. (To learn more, read "Hamburger Economics: The Big Mac Index.")