The Big Mac Index is an informal way of measuring the purchasing power parity (PPP) between two currencies As stated in the Economist, it “seeks to make exchange-rate theory a bit more digestible”.

· The Big Mac Index was introduced by The Economist in September 1986

· The index also gave rise to the word burgernomics.

It is based on the principle 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 considered to be a single Big Mac sandwich as sold by the McDonald’s fast food restaurant chain. The Big Mac was chosen because of the high degree of standardization of the BIG MAC burger across many countries around the world, with local McDonald’s franchisees having significant responsibility for negotiating input prices.

Hence the index enables a comparison between many countries’ currencies. Some menu items are market specific, which would hinder a comparison, if used. Still other menu items are specially priced, such as the dollar menu in many U.S. restaurants consisting of sandwiches and other items that cost $1.

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

For example, suppose the price of a Big Mac is $2.50 in the United States and Rs.100 in India; thus, the PPP rate is 2.50/100= 40. If, the actual USD rate is 1$ = Rs. 45 then USD is under-valued (40

The burger methodology has limitations in its estimates of the PPP. In many countries, eating at international fast-food chain restaurants such as McDonald’s is relatively expensive in comparison to eating at a local restaurant, and the demand for Big Macs is not as large in countries like India as in the United States.

Social status of eating at fast food restaurants like McDonald’s, local taxes, levels of competition, and import duties on selected items may not be representative of the country’s economy as a whole. In addition, there is no theoretical reason why non-tradable goods and services such as property costs should be equal in different countries: this is the theoretical reason for PPPs being different from market exchange rates over time. Nevertheless, the Big Mac Index has become widely cited by economists.



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