THE BIG MAC INDEX
Fun fact: No country with a McDonalds has ever attacked America. Another fun fact: You can gauge the relative value of a currency by the cost of a McDonald’s Big Mac in that currency vs. the price in American dollars.
The Big Mac index is based on the idea of purchasing power parity. Purchasing Power Parity is the concept that two identical products and services should cost the same thing in two different countries. If they don’t, the exchange rate is theoretically off. Let’s say that the current price of a Big Mac in the USA is, dare to dream, $2 and the same Big Mac in Mexico costs $1 American. That would mean that the Mexican dollar is undervalued by 50%. Theoretically, the Mexican burger should cost the equivalent of $2 in Pesos.
It may sound silly – and the tastiest index of them all did indeed start as a joke – but there have been a slew of scholarly papers addressing the Big Mac Index and it is indeed used as a genuine indicator of relative currency values.