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Big Mac Index

Big Mac Index

Published by The Economist, the Big Mac Index is an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries.

Big Mac Index "seeks to make exchange-rate theory a bit more digestible". The index, created in 1986, takes its name from the Big Mac, a hamburger sold at McDonald's restaurants. It divides the price of Big Macs in each countries currency, and compares it against the current exchange rate.





One suggested method of predicting exchange rate movements is that the rate between two currencies should naturally adjust so that a sample basket of goods and services should cost the same in both currencies. In the Big Mac Index, the basket in question is a single Big Mac burger as sold by the McDonald's fast food restaurant chain. The Big Mac was chosen because it is available to a common specification in many countries around the world as local McDonald's franchisees at least in theory have significant responsibility for negotiating input prices. For these reasons, the index enables a comparison between many countries' currencies.



The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is undervalued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is overvalued.



For example, using figures in July 2008:



The price of a Big Mac was $3.57 in the United States (varies by store)

The price of a Big Mac was £2.29 in the United Kingdom (varies by region)

The implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56

This compares with an actual exchange rate of $2.00 to £1 at the time

(2.00-1.56)/1.56 = 28%

The pound was thus overvalued against the dollar by 28%

The Eurozone is mixed, as prices differ widely in the EU area. As of April 2009, the Big Mac is trading in Germany at €2.99, which translates into US$3.96, which would imply that the euro is trading above the PPP, with the difference being 10.9%.



MacCoin

In 2018, McDonald's, to celebrate the 50th anniversary of Big Mac, issued a currency named MacCoin. Each MacCoin was redeemable for one Big Mac and could not be converted into cash by the restaurant. MacCoin was redeemable in more than 50 countries but only until the end of 2018.

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