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 pounds 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.

References in periodicals archive

In 1986, The Economist published the oversimplified burgernomics, as a tongue-in-cheek example of Big Mac PPP. It examines the purchasing power parity between nations, using the cost of a Big Mac as a benchmark.

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The Big Mac PPP exchange rate between two countries is obtained by dividing the cost of a Big Mac in one country (in its currency) by the cost of a Big Mac in another country (in its currency).

Food for thought

(8) The latter measures the exchange rate implied by Big Mac PPP. If the exchange rate implied by PPP (the price ratio) is above the actual exchange rate, e, then in order for PPP to hold, the foreign currency price of a dollar must rise--that is, the foreign currency must depreciate.

price Local price Exchange Country rate Big Mac Big Mac PPP rate Mexico 3.36 2.30 8.1 105 6.37 Thailand 26.1 2.42 46.7 74 40 Malaysia 2.5 2.42 3.87 64 3.72 Singapore 1.44 2.42 3 86 1.62 South Korea 894 2.42 2300 106 1474 Taiwan 27.6 2.42 68 102 33 Russia 5.999 2.56 12 78 24.7 Brazil 1.14 2.56 3.1 106 1.73 Argentina 1.0 2.54 2.5 98 3.13 Survey after crisis U.S.

Burgernomics: a Big Mac[TM] guide to purchasing power parity

Table A1 reports measures of Big Mac PPP against the U.S.

For here or to go? Purchasing Power Parity and the Big Mac

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