What Is the Big Mac Index?
The Big Mac index is a survey created by The Economist magazine in 1986 to measure purchasing power parity (PPP) between nations, using the price of a McDonald's Big Mac as the benchmark.
Purchasing power parity is an economic theory that states that exchange rates over time should move toward equality across national borders in the price charged for an identical basket of goods. In this case, the basket of goods is a Big Mac.
The Big Mac Index is also known as the Big Mac PPP or Burgernomics.
Key Takeaways
- The Big Mac Index was created to measure the disparities in consumer purchasing power between nations.
- The burger replaces the "basket of goods" traditionally used by economists to measure differences in consumer pricing.
- The index was created with tongue in cheek, but many economists say it's roughly accurate.
Understanding the Big Mac Index
According to PPP theory, any change in the exchange ratebetween nations should be reflected in a change in the price of a basket of goods.
One of the key insights of the Big Mac Index is that a basket of goods in one country can rarely be precisely duplicated in another country. For example, an American basket of groceries and a Japanese basket of groceries will likely contain very different products. A Big Mac, though, is always a Big Mac, allowing for slight local differences in ingredients.
The editors of The Economist stress that the index should not be taken too seriously. "Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible," an explainer on the site indicates.
Based on the Big Mac Index, the British pound was undervalued by 3.8% against the U.S. dollar in August 2023.
Nevertheless, the Big Mac Index has become a global standard for price comparison. The Economist website shows the index in 54 countries, revealing that a Big Mac is relatively pricey in Switzerland, while people in Indonesia, India, and Taiwan are getting a bargain.
The Big Mac Index In Use
In August 2023, The Economist concluded that a Big Mac cost $5.58 in the U.S. and £4.19 in the U.K. The difference between the implied exchange rate of 0.75 and the actual exchange rate of 0.78 suggests the undervaluation.
As The Economist editors are quick to note, the Big Mac Index is not a perfect instrument.
As of 2023, McDonald's has outlets in 111 of 195 countries. Thus, this methodology cannot be used to analyze the PPP between the U.S. dollar and countries without a McDonald's, such as Bolivia or Iceland.
Nevertheless, economists consider the index to be a relatively accurate real-world indicator of local economic purchasing power since the pricing of a Big Mac, like most consumer goods, must take into account local costs of raw materials, labor, taxes, and business premises.
What Is the Big Mac Index?
The Big Mac index is a measurement sometimes used to discern the difference in purchasing power parity between two countries where BicMacs are sold. It began as somewhat of an economics joke, but it turned out to be fairly reliable.
Is the Big Mac Index a Good Indicator of Inflation?
The costs of raw materials, labor, transportation, taxes, and others are priced into Big Macs, so it is safe to say that the price of a Big Mac can reflect inflationary pressures.
What Is the Most Accurate Inflation Indicator?
The Consumer Price Index is considered the most accurate indication of inflation.
The Bottom Line
The Big Mac Index measures the cost of a Big Mac in different countries and indicates the difference in purchasing power parity between them. It has become accepted as a fairly reliable currency parity indicator for developed, developing, and non-developed countries (as long as Big Macs are sold there).
FAQs
The purpose of the Big Mac index is to calculate an implied exchange rate between two currencies. In order to calculate the Big Mac index, the price of a Big Mac in a foreign country (in the foreign country's currency) is divided by the price of Big Mac in a base country (in the base country's currency).
What is the Big Mac Index in simple terms? ›
The Big Mac Index measures the cost of a Big Mac in different countries and indicates the difference in purchasing power parity between them. It has become accepted as a fairly reliable currency parity indicator for developed, developing, and non-developed countries (as long as Big Macs are sold there). Economist.
What is the Big Mac Index an example of? ›
The Big Mac Index is a type of purchasing power parity comparing the prices of Big Macs in two different countries. The Big Mac Theory was first introduced in an article in The Economist in 1986 and promoted the concept of "burgernomics" to help measure inflation rates and exchange rates.
Is Big Mac Index a good indicator of inflation? ›
Though Big Mac inflation does seem to track CPI inflation, its path can diverge from overall inflation because of price deviations relative to other goods and services in the U.S. consumer basket.
What does The Economist Big Mac Index suggest? ›
The Economist's Big Mac index is based on the theory of purchasing-power parity, which holds that exchange rates should adjust until the price of an identical basket of goods costs the same everywhere.
Who has the highest Big Mac Index? ›
At 8.17 U.S. dollars, Switzerland has the most expensive Big Macs in the world, according to the January 2024 Big Mac index. Concurrently the cost of a Big Mac was 5.69 dollars in the U.S., and 5.87 U.S. dollars in the Euro area.
What's a good use for the Big Mac Index? ›
The purpose of the Big Mac index is to calculate an implied exchange rate between two currencies.
What country has the cheapest Big Mac? ›
The ten countries with the lowest Big Mac Index are Turkey, Hungary, Taiwan, Malaysia, Egypt, India, Indonesia, South Africa, Romania, and Venezuela. In Venezuela, the cost of a Big Mac is just $1.76, a reflection of the nation's ongoing hyperinflation and currency devaluation.
What is the meaning of Big Mac? ›
A hamburger from the fast food company McDonald's, served on a three-part bun with various condiments.
What is the most accurate inflation indicator? ›
Typically, prices rise over time, but prices can also fall (a situation called deflation). The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households.
High inflation has historically correlated with lower returns on equities. Value stocks tends to perform better than growth stocks in high inflation periods, and growth stocks tend to perform better during low inflation.
How much is a Big Mac in 2024? ›
The survey found that an average medium Big Mac meal has risen in price from $5.69 in 2014 to $9.72 in 2024, an increase of about 70%. The price of a medium Big Mac meal ranged in price from $7.89 in Houston to $15 in Seattle.
What does the Big Mac Index tell us? ›
The Big Mac Index is a survey done by The Economist that examines the relative over or undervaluation of currencies based on the relative price of a Big Mac across the world.
How does the Big Mac Index help determine whether a currency is overvalued or undervalued? ›
The Big Mac Index is calculated by dividing the local currency price of a Big Mac in one country by its price in another to arrive at an exchange rate. This exchange rate is then compared to the official exchange rate between the two currencies to determine if either currency is undervalued or overvalued.
What economists Big Mac Index suggests? ›
Answer. Answer: The Economist's Big Mac Index, which aims to equalize the cost of a basket of goods globally, is an example of Purchasing Power Parity (PPP).
What is the Big Mac Index quizlet? ›
The "Big Mac Index" measures the PPP between nations using the price of a Big Mac as the benchmark. The Big Mac Index suggests, in theory, changes in exchange rates between currencies should affect the price consumers pay for a Big Mac in a particular nation, replacing the "basket" with the famous hamburger.
How the Big Mac Index perfectly explains the relative size of economies? ›
Purchasing power parity (PPP) is a well-known theory that seeks to define relationships between currencies. The Big Mac Index perfectly explains the relative size of economies. The Big Mac Index suggests that exchange rates should leave Big Mac hamburgers costing the same in the U.S. as abroad.
