Big Mac Index

Purchasing-power parity is like a special calculator that helps economists compare different countries' currencies based on how much stuff you can buy with them.  Imagine you have a $10 bill, and you want to buy some candy. In the United States, that $10 might get you 10 candy bars. But if you go to another country, that same $10 could buy you 20 candy bars or maybe only 5, depending on the value of the exchange rate.

Since 1986, the Economist (a weekly magazine) has been publishing their Big Mac Index.  This is a fun way to show how currencies are valued relative to others at a particular point in time.  It compares what the two all-beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame seed bun delight will set you back in a particular country.  If the burger is cheaper in one country compared to another, it means your money will go further there.  As an example, if a Big Mac sets you back $5.00 at your local Golden Arches and a currency in another country is half the value of a dollar, then purchasing a McDonald’s classic should cost 10 of the competing currency since the sandwich is identical in both locations. 

What happens if the currency ratio doesn’t hold up when purchasing a Big Mac?  In this case, the Economist would argue the traders have the currency pair priced incorrectly.  For instance, they point out in their latest report that if one exchanges dollars into the Swiss Franc, you will only receive enough to purchase 70 percent of a Big Mac (suggesting the franc is too expensive), but on the other side of the Matterhorn, the cost is much closer to the same as in the U.S. indicating the euro is priced about right.

Currencies exchange hands 24 hours a day and are subject to the same emotional surges of other traded assets.  The Big Mac Index is a lighthearted way to look at this complex marketplace.  Perhaps on your next trip out of the country you could make a comparison of your own and report your results back to Atlas.