The Big Mac Index, a creation of The Economist in 1986, serves as a lighthearted means to assess whether currencies are at their appropriate levels. It is founded on the theory of purchasing-power parity (PPP), which posits that in the long run, exchange rates should move towards a rate that equalizes the prices of an identical basket of goods and services, in this case, a burger, in any two countries. This index was never intended to be a precise measure of currency misalignment but rather a tool to make exchange-rate theory more accessible.
Global Impact and Academic Studies
The Big Mac Index has emerged as a global standard and is included in numerous economic textbooks and the subject of numerous academic studies. It has gained significant attention and relevance in the field of economics. For those with a more serious interest in fast food, a gourmet version of the index has also been calculated.Addressing Criticisms
The GDP-adjusted index was developed to address the criticism that average burger prices are typically lower in poor countries due to lower labor costs. PPP indicates the long-term direction in which exchange rates should head as a country like China becomes richer. However, it provides limited insights into the current equilibrium rate. The relationship between prices and GDP per person is considered a better guide to the current fair value of a currency.Methodology Updates
In July 2022, the Big Mac Index was updated to use a McDonald's-provided price for the United States. Additionally, the methodology for calculating the GDP-adjusted index was changed. Now, whenever the IMF's historical GDP series are updated, the full history of both indices will be adjusted. The previously published versions of both indices are available in the archive.Related Readings and Downloads
For more information about the Big Mac Index, one can read "What Donald Trump can learn from the Big Mac Index". Data can also be downloaded, and the methodology behind the Big Mac Index can be accessed here. It is important to note that the GDP-adjusted index was updated in January 2021 to include more countries. Additionally, an earlier version of the index had the wrong Big Mac price for China in January 2024, and this has been corrected.