Definition
Big Mac Index
The Big Mac index is The Economist's light-hearted gauge of currency valuation, comparing the price of a McDonald's Big Mac across countries to test purchasing power parity.
By comparing what a Big Mac costs in different currencies, the index estimates whether a currency is over- or undervalued against the dollar under PPP. A cheaper burger implies an undervalued currency.
The rupee typically looks deeply undervalued on the Big Mac index, consistent with lower local prices in developing economies. Though informal (a burger isn't a true universal basket and includes local labour and rent), it neatly illustrates the PPP concept.
Related terms
- Real Effective Exchange Rate (REER)REER is a trade-weighted index of a currency against a basket of partner currencies, adjusted for inflation differences, measuring true competitiveness rather than a single bilateral rate.
- Purchasing Power Parity (PPP)Purchasing power parity holds that exchange rates should equalise the price of an identical basket of goods across countries, so a currency's true value reflects what it can buy.
- Comparative AdvantageComparative advantage is the principle that countries gain by specialising in goods they produce at the lowest opportunity cost and trading for the rest, even if one is better at everything.
- Price Elasticity of DemandPrice elasticity of demand measures how sharply the quantity people buy responds to a change in price; elastic goods react strongly, inelastic ones barely react.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.