Big Mac PPP

Big Mac PPP

A survey done by the Economist that determines what a country's exchange rate would have to be for a Big Mac in the country to cost the same as it does in the United States. Purchase power parity (PPP) is a theory that currencies adjust according to changes in their purchasing power. With the Big Mac PPP the purchasing power is reflected by the price of the Big Mac in that country. The purpose of the measure is to give a guide to how over- or undervalued a currency is.

Notes:

The calculation of the Big Mac PPP-adjusted exchange rate looks at the price of a Big Mac in a foreign country and divides it by the price of a U.S. Big Mac. Say we are looking at the Big Mac in China. If a Chinese Big Mac is 10.41 yuan and the U.S. price is 2.90 dollars, then according to PPP, the exchange rate should be 3.59 yuan for one U.S. dollar. However if the yuan were trading in the currency market at 8.27 yuan for one U.S. dollar, the Big Mac PPP indicates that the yuan is undervalued.

See also: Currency, Fixed Exchange Rate, Floating Exchange Rate, Purchasing Power Parity - PPP, Purchasing Power, Relative Purchase Power Parity