The Randall Sensei

Big Mac Index

The Big Mac Index is a popular economic indicator used to measure the purchasing power parity (PPP) between two currencies. It was created by The Economist magazine in 1986 as a fun and informal way to compare the relative value of different currencies. The index is based on the theory that a basket of goods should cost the same amount in different countries when adjusted for exchange rates. The basket of goods in this case is a Big Mac, a burger sold by McDonald’s in more than 100 countries.

The index compares the price of a Big Mac in one country to the price of a Big Mac in another country, using the exchange rate to convert the prices into a common currency. If a Big Mac costs $5 in the US and €3 in the Eurozone, for example, the exchange rate would be 1.67 dollars to the euro. If the exchange rate were perfectly in line with the PPP, then the price of a Big Mac should be the same in both countries after conversion.

However, if the Big Mac costs less in the Eurozone than in the US after conversion, it suggests that the euro is undervalued compared to the dollar. Conversely, if the Big Mac costs more in the Eurozone than in the US after conversion, it suggests that the euro is overvalued compared to the dollar. In this way, the Big Mac Index provides a rough estimate of the relative value of different currencies, based on the cost of a common basket of goods.

While the Big Mac Index is not a scientific or official measure of PPP, it has become a popular and widely recognized tool for comparing the value of different currencies. It is also often used as a way to explain complex economic concepts, such as exchange rates and PPP, in a simple and accessible way. The index is updated regularly by The Economist and is widely cited in the media and academic literature.

In conclusion, the Big Mac Index is a useful and fun way to compare the relative value of different currencies. It provides a rough estimate of the purchasing power parity between two currencies, based on the cost of a common basket of goods, and has become a widely recognized tool for economists and journalists alike. However, it is important to keep in mind that the index is not a scientific measure and should not be used as the sole basis for making investment decisions.

The current Big Mac index can be found here.