The Big Mac index
A 1986 joke in The Economist became one of the most cited ways to compare currencies, using the price of a hamburger.
Purchasing power parity is the idea that, in the long run, exchange rates should adjust so that the same basket of goods costs the same everywhere. Measuring a real basket across countries is hard. In 1986, The Economist journalist Pam Woodall suggested a basket of exactly one item: a Big Mac.
How to read it
If a Big Mac costs $5.50 in the US and the equivalent of $3.50 in another country, the burger suggests that country’s currency is undervalued against the dollar by about a third. If it costs $7, the currency looks overvalued.
Why it’s imperfect, and still useful
- A burger includes local costs such as rent and wages, which are naturally cheaper in poorer countries. The Economist now publishes a GDP-adjusted version.
- Taxes, competition and McDonald’s pricing strategy vary by country.
- In some places a Big Mac is a cheap meal; in others it is a treat.
The index lasts because it is concrete. Most people will never read a purchasing-power paper, but anyone can compare burger prices on holiday. Explaining an abstract idea through a familiar object is a good way to make it stick.
Bring it up
“Economists actually use the price of a Big Mac to judge whether currencies are overvalued.”
Follow the thread
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