The Big Mac Index is the Economist magazine’s fun little twist on what economists call Purchasing Power Parity. Purchasing Power Parity is the idea that a particular amount of any currency should buy the same amount of “stuff” in every country and that, should it not, the currency should regress back to the mean of being able to buy that same amount of stuff. In this little analogy of Big Macs, the MacDonald’s Big Mac is the “stuff” and a dollar’s worth of Big Mac should be equal to a dollar’s worth, in another currency, of Big Mac, in that other country. When it isn’t, then you have an overvaluation or undervaluation of currency. It really helps people understand the otherwise complex topic within exchange rate theory.
Well, it’s not the only one, though it’s certainly the most well-known since it was the first and because MacDonald’s is so ubiquitous. There’s the popular Starbucks latte test, the Coca-Cola index, the sushi index, and my favorite one of them all, the Steakhouse index. Mmm… steak.