Big Mac PPP

Big Mac PPP

A measure of purchasing power parity that observes the price of a Big Mac in a given country relative to the price of a Big Mac in the United States, with a goal of determining the real value of a currency. Purchasing power parity is a theory stating that the same good or service costs the same amount regardless of the currency in which it is measured. For instance, if 1 pound is equivalent to 2 dollars, and a widget costs 1 pound in England, then purchasing power parity would state that the same widget would cost 2 dollars in the United States.

Big Mac PPP attempts to see how well this holds by measuring the prices of Big Macs. It is calculated by taking the price of a Big Mac in a given country and dividing by the price of an American Big Mac. This gives a relative exchange rate of the two countries and helps one see if a currency is overvalued or undervalued. For example, if a Big Mac costs $1 in the United States and ?0.75 in the United Kingdom, the Big Mac PPP is 0.75 GBP:USD. If the official GBP:USD exchange rate is 0.50, then this indicates that the pound is overvalued. The Big Mac PPP is published by The Economist. See also: Currency pair.