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 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.

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.")

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. How does a decline in housing prices affect the banking sector?

    Learn about the affects on banks when housing prices go down, including loan delinquency rates, mortgage foreclosures, and ... Read Answer >>
  3. Why is the British pound / U.S. dollar currency pair known as "trading the cable"?

    The British pound / U.S. dollar currency pair is one of the oldest and most widely-traded currency pairs in the world. The ... Read Answer >>
  4. In economics, what is an index number?

    Read about the role of an index number in economics and how index numbers can be applied to all kinds of data, such as inflation ... Read Answer >>
Related Articles
  1. 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.
  2. 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.
  3. Investing

    Apple to Launch 'Completely Rethought' Mac Pros

    The company has "completely rethought" its approach to Mac Pros.
  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

    McDonald's Makes 2 Big Changes to the Big Mac

    Despite five straight quarters of higher comparable-store sales growth, McDonald's (NYSE: MCD) is having trouble attracting more customers to its restaurants. The gains it's made in the important ...
  6. 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.
  7. Personal Finance

    Freddie Mac Expands 3% Down Mortgage Program

    Freddie Mac is making it easier for more borrowers to own a home by launching a new 3% down payment mortgage product.
  8. Personal Finance

    Freddie Mac: Mortgage Rates Could Go Higher if Inflation Increases

    Freddie Mac warned that, if inflation increases, so should mortgage rates.
  9. Personal Finance

    Mortgage Rates Restart the March Higher: Freddie Mac

    Mortgage rates inched up after the Federal Reserve raised interest rates by a quarter of a percentage point.
  10. 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

    Big Mac PPP is a survey done by The Economist that examines the ...
  2. Burgernomics

    Burgernomics refers to the Economist's Big Mac Index, which tracks ...
  3. Message Authentication Code - MAC

    A message authentication code (MAC), or tag, is a security code ...
  4. Federal Agricultural Mortgage Corporation (FAMC)

    Farmer Mac, the Federal Agricultural Mortgage Corporation, was ...
  5. Gnomes

    Gnomes were 15-year, fixed-rate, pass-through securities offered ...
  6. Relative Purchasing Power Parity (RPPP)

    Relative Purchasing Power Parity (RPPP) is the view that inflation ...
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center