Big Mac Index

The Big Mac Index was introduced by The Economist in September 1986 as a light-hearted but analytically useful illustration of purchasing power parity (PPP) — the theory that, in the long run, exchange rates should move toward levels that equalize the prices of an identical basket of goods and services across countries.

Because a Big Mac is a roughly standardized product sold in dozens of countries, its local price (converted into US dollars at the prevailing market exchange rate) can be compared to its US price. If a Big Mac costs less abroad than in the United States, the local currency is, by this measure, undervalued against the dollar; if it costs more, the currency is overvalued.

The index is updated twice a year and now covers roughly 50–55 economies. The Economist also publishes a GDP-adjusted version, which accounts for the fact that labor and rents — major components of a burger's price — are cheaper in poorer countries, so raw PPP comparisons systematically overstate currency undervaluation in lower-income economies.

Limitations are well known and worth flagging in any research note:

• Non-tradable inputs (local wages, rent, taxes, marketing) dominate the price, so the law of one price cannot fully apply.
• Market structure varies: McDonald's pricing power, franchise economics, and import tariffs on beef or wheat differ by country.
• Cultural and dietary factors affect demand and therefore equilibrium pricing — the Big Mac is a premium product in India (where the Maharaja Mac substitutes), making cross-country comparisons imperfect.
• It captures only one good, unlike broader PPP measures from the World Bank's International Comparison Program or the OECD.

Despite these caveats, the index is widely cited in introductory economics courses, financial journalism, and policy commentary as an intuitive entry point to exchange-rate theory.