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The Big Mac Index is an informal way of measuring the purchasing power parity
Purchasing power parity

The purchasing power parity theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1920, it is based on the law of one price: the theory states that, in ideally efficient markets, identical goods should have only one price....
 (PPP) between two currencies
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
 and provides a test of the extent to which market exchange rate
Exchange rate

In finance, the exchange rates between two currency specifies how much one currency is worth in terms of the other. It is the value of a foreign nation?s currency in terms of the home nation?s currency....
s result in goods costing the same in different countries. As stated in The Economist
The Economist

The Economist is an English-language weekly news and international relations publication owned by The Economist Newspaper Ltd. and edited in London....
, it "seeks to make exchange-rate theory a bit more digestible".

The index takes its name from the Big Mac
Big Mac

The Big Mac is a hamburger sold by the international fast-food chain store McDonald's. It is one of the company's signature products, along with the Quarter Pounder....
, a hamburger
Hamburger

A hamburger consists of a cooked ground meat patty, usually beef, placed in a sliced bun or between pieces of bread or toast. Hamburgers are often served with various condiments, such as ketchup, mustard, mayonnaise, relish etc....
 sold at McDonald's
McDonald's

McDonald's Corporation is the world's largest chain of fast food restaurants, serving nearly 58 million customers daily. McDonald's primarily sells hamburgers, cheeseburgers, chicken products, French fries, breakfast items, soft drinks, milkshakes, and desserts....
 restaurants.

Big Mac Index was introduced in The Economist
The Economist

The Economist is an English-language weekly news and international relations publication owned by The Economist Newspaper Ltd. and edited in London....
 in September 1986 by as a semi-humorous illustration and has been published by that paper annually since then.






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The Big Mac Index is an informal way of measuring the purchasing power parity
Purchasing power parity

The purchasing power parity theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1920, it is based on the law of one price: the theory states that, in ideally efficient markets, identical goods should have only one price....
 (PPP) between two currencies
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
 and provides a test of the extent to which market exchange rate
Exchange rate

In finance, the exchange rates between two currency specifies how much one currency is worth in terms of the other. It is the value of a foreign nation?s currency in terms of the home nation?s currency....
s result in goods costing the same in different countries. As stated in The Economist
The Economist

The Economist is an English-language weekly news and international relations publication owned by The Economist Newspaper Ltd. and edited in London....
, it "seeks to make exchange-rate theory a bit more digestible".

The index takes its name from the Big Mac
Big Mac

The Big Mac is a hamburger sold by the international fast-food chain store McDonald's. It is one of the company's signature products, along with the Quarter Pounder....
, a hamburger
Hamburger

A hamburger consists of a cooked ground meat patty, usually beef, placed in a sliced bun or between pieces of bread or toast. Hamburgers are often served with various condiments, such as ketchup, mustard, mayonnaise, relish etc....
 sold at McDonald's
McDonald's

McDonald's Corporation is the world's largest chain of fast food restaurants, serving nearly 58 million customers daily. McDonald's primarily sells hamburgers, cheeseburgers, chicken products, French fries, breakfast items, soft drinks, milkshakes, and desserts....
 restaurants.

Overview

The Big Mac Index was introduced in The Economist
The Economist

The Economist is an English-language weekly news and international relations publication owned by The Economist Newspaper Ltd. and edited in London....
 in September 1986 by as a semi-humorous illustration and has been published by that paper annually since then. The index also gave rise to the word burgernomics.

The investment bank UBS AG
UBS AG

UBS Aktiengesellschaft is a diversified global financial services company, with its main headquarters in Basel and Z?rich, Switzerland. It is the world's largest manager of private wealth assets, "the world's biggest manager of other people's money" and is also the second-largest bank in Europe, by both market capitalisation and profitabil...
 has expanded the idea of the Big Mac Index to include the amount of time that an average worker in a given country must work to earn enough to buy a Big Mac. The working time-based Big Mac index might give a more realistic view of the purchasing power of the average worker, as it takes into account more factors, such as local wages.

One suggested method of predicting exchange rate movements is 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 (PPP)
Purchasing power parity

The purchasing power parity theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1920, it is based on the law of one price: the theory states that, in ideally efficient markets, identical goods should have only one price....
. In the Big Mac Index, the "basket
Basket (finance)

A basket is an Economics term for a group of several security created for the purpose of simultaneous buying or selling. Baskets are frequently used for program trading....
" in question is considered to be a single Big Mac
Big Mac

The Big Mac is a hamburger sold by the international fast-food chain store McDonald's. It is one of the company's signature products, along with the Quarter Pounder....
 burger as sold by the McDonald's
McDonald's

McDonald's Corporation is the world's largest chain of fast food restaurants, serving nearly 58 million customers daily. McDonald's primarily sells hamburgers, cheeseburgers, chicken products, French fries, breakfast items, soft drinks, milkshakes, and desserts....
 fast food restaurant chain. The Big Mac was chosen because it is available to a common specification in many countries around the world, with local McDonald's franchisees
Franchising

Franchising refers to the methods of practicing and using another person's philosophy of business. The franchisor grants the independent operator the right to distribute its products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee....
 having significant responsibility for negotiating input prices. For these reasons, the index enables a comparison between many countries' currencies.

The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its 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, using figures in July 2008:
  • the price of a Big Mac was $3.57 in the United States
    United States

    The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
  • the price of a Big Mac was £2.29 in the United Kingdom (Britain)
  • the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56
  • this compares with an actual exchange rate of $2.00 to £1 at the time
  • the pound was thus overvalued against the dollar by 28%
    • ie the actual exchange rate divided by implied purchasing parity ? 2 divided by 1.56 = 1.28


Variants

The Economist sometimes produces variants on the theme. For example in January 2004, it showed a Tall Latte index with the Big Mac replaced by a cup of Starbucks
Starbucks

Starbucks Corporation is an international coffee and List of coffeehouse chains based in Seattle, Washington, United States. Starbucks is the largest coffeehouse company in the world, with 16,120 stores in 44 countries....
 coffee
Coffee

Coffee is a brewed drink prepared from roasted seeds, commonly called coffee beans, of the Coffea. Caffeinated coffee has a stimulating effect in humans....
. In a similar vein, in 1997, the newspaper drew up a "Coca-Cola
Coca-Cola

Coca-Cola is a carbonation soft drink sold in stores, restaurants and vending machines worldwide . It is produced by The Coca-Cola Company in Atlanta, Georgia, and is often referred to simply as Coke or as Cola or Pop....
 map" that showed inverse proportionality between the amount of Cola consumed per capita
Per capita

Per capita is a Latin phrase meaning per head with per meaning "through" or "by" and capita meaning "heads." Both words together equate to the phrase "for each head."...
 in a country and that country's health.

In 2007, an Australian bank, Commonwealth Securities, adopted the Big Mac index and created the iPod
IPod

iPod is a brand of portable media players designed and marketed by Apple Inc. and launched on . The product line-up includes the hard drive-based iPod Classic, the touchscreen iPod Touch, the video-capable iPod Nano, and the compact iPod Shuffle....
 Index. The bank's theory is that since the iPod is manufactured at a single place, the value of iPods should be more consistent globally. However, this theory can be criticised for ignoring shipping costs, which will vary depending on how far the product is delivered from its "single place" of manufacture.

Limitations

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
McDonald's

McDonald's Corporation is the world's largest chain of fast food restaurants, serving nearly 58 million customers daily. McDonald's primarily sells hamburgers, cheeseburgers, chicken products, French fries, breakfast items, soft drinks, milkshakes, and desserts....
 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
India

India, officially the Republic of India , is a country in South Asia. It is the List of countries and outlying territories by total area country by geographical area, the List of countries by population country, and the most populous liberal democracy in the world....
 as in the United States
United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
. 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, economists widely cite the Big Mac Index as a real world measurement of purchasing power parity.

Figures

Five most expensive (as of July 2008)
  1. Norway
    Norway

    Norway , officially the Kingdom of Norway, is a constitutional monarchy in Northern Europe that occupies the western portion of the Scandinavian Peninsula....
     - USD 7.88
  2. Sweden
    Sweden

    Sweden , officially the Kingdom of Sweden , is a Nordic countries on the Scandinavian Peninsula in Northern Europe. Sweden has land borders with Norway to the west and Finland to the northeast, and it is connected to Denmark by the ?resund Bridge in the south....
     - USD 6.37
  3. Switzerland
    Switzerland

    Switzerland is a landlocked Swiss Alps country of roughly 7.7 million people in Western Europe with an area of 41,285 km?. Switzerland is a federal republic consisting of 26 states called Cantons of Switzerland....
     - USD 6.36
  4. Iceland
    Iceland

    Iceland, officially the Republic of Iceland , is an island country located in the North Atlantic Ocean between mainland Europe and Greenland....
     - USD 5.97
  5. Denmark
    Denmark

    Denmark is a Scandinavian country in northern Europe and the senior member of the Kingdom of Denmark. It is the southernmost of the Nordic countries....
     - USD 5.95


Five most affordable

  1. Malaysia
    Malaysia

    Malaysia is a federation that consists of States of Malaysia in Southeast Asia with a total landmass of . The capital city is Kuala Lumpur, while Putrajaya is the seat of the federal government....
     - USD 1.70
  2. Hong Kong
    Hong Kong

    Hong Kong , officially the Hong Kong Special Administrative Region, is a territory located in Southern China in East Asia, bordering the province of Guangdong to the north and facing the South China Sea to the east, west and south....
     - USD 1.71
  3. China
    China

    China is a Culture of China, an ancient civilization, and, depending on perspective, a national or multinational entity extending over a large area in East Asia....
     - USD 1.83
  4. Thailand
    Thailand

    The Kingdom of Thailand is an independent country that lies in the heart of Southeast Asia. It is bordered to the north by Laos and Myanmar, to the east by Laos and Cambodia, to the south by the Gulf of Thailand and Malaysia, and to the west by the Andaman Sea and Myanmar....
     - USD 1.86
  5. Sri Lanka
    Sri Lanka

    Sri Lanka, officially the Democratic Socialist Republic of Sri Lanka is an island country in South Asia, located about off the southern coast of India....
     - USD 1.95


Ten fastest earned
  1. Tokyo
    Tokyo

    , officially , is one of the 47 prefectures of Japan of Japan and located on the eastern side of the main island Honshu. The twenty-three special wards of Tokyo, each governed as a city, cover the area that was once the Tokyo City in the eastern part of the prefecture, and total over 8 million people....
    , Japan - 10 minutes
  2. Los Angeles
    Los Angeles, California

    Los Angeles is the largest city in the U.S. state of California and the List of United States cities by population in the United States. Often abbreviated as L.A. and nicknamed The City of Angels, Los Angeles is rated as a beta global city, has an estimated population of 3.8 million and spans over in Southern California....
    , United States - 11 minutes
  3. Chicago
    Chicago

    Chicago is the largest city in the U.S. state of Illinois and the Midwestern United States, as well as the List of United States cities by population city in the United States with more than 2.8 million residents....
    , Illinois
    Illinois

    The State of Illinois is a U.S. state of the United States, the 21st to be admitted to the United States. Illinois is the most populous and demographically diverse Midwestern United States state and the fifth most populous state in the nation....
     United States - 12 minutes
  4. Miami
    Miami, Florida

    Miami is a global city in southeastern Florida, in the United States. Miami is the county seat of Miami-Dade County, Florida, the most populous county in Florida....
    , Florida
    Florida

    Florida is a U.S. state located in the Southeastern United States of the United States, bordering Alabama to the northwest and Georgia to the northeast....
     United States - 12 minutes
  5. New York City
    New York City

    The City of New York is the List of United States cities by population in the United States, while the New York metropolitan area ranks among the List of urban areas by population....
    , New York
    New York

    The State of New York is a U.S. state in the Mid-Atlantic States and Northeastern United States regions of the United States and is the nation's List of U.S....
     United States - 13 minutes
  6. Auckland
    Auckland

    The Auckland metropolitan area or Greater Auckland, in the North Island of New Zealand, is the largest and most populous urban areas of New Zealand with over 1.3 million residents, percent of the country's population....
    , New Zealand - 14 minutes
  7. Sydney
    Sydney

    Sydney is the List of cities in Australia by population in Australia, with a metropolitan area population of approximately 4.34 million . It is the List of Australian capital cities of New South Wales, and was the site of the first British Empire colony in Australia....
    , Australia - 14 minutes
  8. Toronto
    Toronto

    Toronto is the List of the 100 largest municipalities in Canada by population in Canada and the Provinces and territories of Canada Provincial and territorial capitals of Canada of Ontario....
    , Canada - 14 minutes
  9. Zürich
    Zürich

    Z?rich is the largest city in Switzerland and the capital of the canton of Z?rich. The city is Switzerland's main commercial and cultural centre and sometimes called the Cultural Capital of Switzerland, the political capital of Switzerland being Berne....
    , Switzerland - 15 minutes
  10. Dublin
    Dublin

    Dublin is both the largest city and capital of Republic of Ireland. It is located near the midpoint of Ireland's east coast, at the mouth of the River Liffey and at the centre of the Dublin Region....
    , Ireland - 15 minutes


Ten slowest earned
  1. Bogotá
    Bogotá

    Bogot? ? officially named Bogot?, D.C. , formerly called Santa Fe de Bogot? ? is the capital city of Colombia, as well as the most populous city in the country, with 6,776,009 inhabitants ....
    , Colombia - 97 minutes
  2. Nairobi
    Nairobi

    Nairobi is the capital city and largest city of Kenya. The city and its surrounding area also forms the Nairobi Province. The name "Nairobi" comes from the Maasai language phrase Enkare Nyirobi, which translates to "the place of cool waters"....
    , Kenya - 91 minutes
  3. Jakarta
    Jakarta

    Jakarta is the Capital and largest city of Indonesia. It also has a List of urban areas by population than any other city in Southeast Asia. It was formerly known as Sunda Kelapa , Jayakarta , Batavia, Dutch East Indies , and Djakarta ....
    , Indonesia - 86 minutes
  4. Lima
    Lima

    Lima is the Capital and largest city of Peru. It is located in the valleys of the Chill?n River, R?mac River and Lur?n River rivers, on a coast overlooking the Pacific Ocean....
    , Peru - 86 minutes
  5. Caracas
    Caracas

    Caracas is the Capital and largest city of Venezuela. It is located in the north of the country, following the contours of the narrow Caracas Valley on the Coastal Range, Venezuela....
    , Venezuela - 85 minutes
  6. Mexico City
    Mexico City

    Mexico City is the capital city of Mexico. It is the most important economic, industrial, and cultural center in the country; the most populous city with over 8,836,045 inhabitants in 2008....
    , Mexico - 82 minutes
  7. Manila
    Manila

    The 'City of Manila' , or simply 'Manila', is the Capital of the Philippines and one of the 17 cities and municipalities that make up Metro Manila....
    , Philippines - 81 minutes
  8. Mumbai
    Mumbai

    Mumbai— formerly Bombay, is the capital of the Indian state of Maharashtra. The city proper has approximately 14 million people and, along with the neighbouring suburbs of Navi Mumbai and Thane, Mumbai forms the World's largest urban agglomerations according to the United Nations World Urbanization Prospects report with around 19...
    , India - 70 minutes
  9. Sofia
    Sofia

    Sofia , is the Capital and largest city of the Bulgaria, with 2,5 million people living in the Capital Municipality. It is located in western Bulgaria, at the foot of the mountain massif Vitosha, and is the administrative, cultural, economic, and educational centre of the country....
    , Bulgaria - 69 minutes
  10. Bucharest
    Bucharest

    Bucharest is the capital city, industrial and commercial centre of Romania. It is the largest city in Romania, located in the southeast of the country, at , and lies on the banks of the D?mbovita River....
    , Romania - 69 minutes


See also

  • Golden Arches Theory of Conflict Prevention
    List of countries with McDonald's franchises

    This is a listing of countries with McDonald's franchises, followed by countries without any. McDonald's is the largest chain of fast food restaurants in the world....
  • Christmas Price Index
    Christmas Price Index

    File:Christmas Price Index.pngThe Christmas Price Index is a tongue-in-cheek economic indicator, maintained by the U.S. bank PNC Financial Services, which tracks the cost of the items in the Christmas carol "The Twelve Days of Christmas ."...
  • Recession index
    Recession index

    The recession index is an informal Index created by The Economist which counts how many stories in the Washington Post and the New York Times using the word ?recession? in a fiscal quarter....
  • List of unusual units of measurement
  • List of humorous units of measurement
    List of humorous units of measurement

    Many comedians and humour writers have made use of, or invented, units of measurement intended primarily for their humour value. This is a list of such units invented by sources that are notable for reasons other than having made the unit itself, and of units that are widely known in the anglophone world for their humour value....


External links

  • — contains Big Mac Index data dating back to 1997 (Economist.com subscription required for detail)
  • Aplia
  • - Discusses origins & significance to international investors - February 9, 2007
  • Good report on purchasing power containing a Big Mac index (in minutes) as well as for staples such as bread and rice for 71 world cities.
  • Very thorough article on the time-based Big Mac index.