Live revision! Join us for our free exam revision livestreams Watch now

Study Notes

What is the Big Mac Index?

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 24 Jul 2023

The Big Mac Index is an informal economic indicator that measures the purchasing power parity (PPP) between different countries. It was created by The Economist magazine in 1986 as a lighthearted way to compare the relative value of currencies and the cost of living in different nations.

The index compares the price of a Big Mac hamburger sold by McDonald's restaurants around the world.

The index is based on the concept of the law of one price, which suggests that in the long run, identical goods should have the same price in different countries once their exchange rates are taken into account. The Big Mac hamburger from McDonald's was chosen as the standard (homogeneous) product for this index because it is a globally recognised item, widely available, and made from similar ingredients in most countries.

The theory behind the Big Mac Index is that if the purchasing power of currencies were in equilibrium, a Big Mac would cost the same in every country. However, in reality, prices for goods and services vary from country to country, due to factors such as differences in indirect taxes, minimum wages, retail rents and transportation costs.

The methodology is straightforward: The price of a Big Mac is recorded in various countries, and the local currency prices are converted into a common currency (usually U.S. dollars) using prevailing exchange rates. The resulting values are then compared to the actual exchange rates to see if a particular currency is overvalued or undervalued relative to the U.S. dollar.

If the local currency price of a Big Mac is lower than the price converted at the current exchange rate, it suggests that the currency is undervalued compared to the U.S. dollar. Conversely, if the local price is higher than

The Big Mac Index is not a perfect measure of PPP, but it is a simple and widely-understood way to compare the relative purchasing power of different currencies. The index has been criticized for a number of reasons, including the fact that the Big Mac is not a perfect example of a standardized product, and that the prices of Big Macs can vary from restaurant to restaurant.

Despite its flaws, the Big Mac Index remains a popular tool for economists and the general public. It is a relatively simple way to get a rough idea of how different currencies compare in terms of purchasing power.

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.