What is Big Mac Index?

The Big Mac index is published by The Economist in September 1986 as an informal way of measuring the purchasing power parity (PPP) between two currencies. It provides a view of the extent to which market exchange rates deviate from their true values.

The Big Mac was chosen because it is available to a common specification in many countries around the world, with local McDonald’s franchisees having significant responsibility for negotiating input prices. Currently McDonald’s Big Mac is sold in about 120 countries. The Big Mac index enables a comparison between many countries’ currencies.

The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). After the value of the Big Mac index is calculated, it is then compared with the actual exchange rate. Comparing actual exchange rates with PPPs or with the Big Max index indicates whether a currency is under- or overvalued.

As of February this year, the most expensive burgers were in Norway (US$5.79), Switzerland (US$5.60), Denmark (US$5.07), Sweden (US$4.58) and Eurozone (US$4.38). Iceland which suffer economic blows earlier are at US$5.75 which is comparable to the one in Switzerland.

Now, here’s the interesting part. According to the same index, Malaysia (US$1.70) actually ranks No 1 among the five most affordable Big Macs, ahead of Hong Kong (US$1.71), China (US$1.83), Thailand (US$1.86) and Sri Lanka (US$1.95).

Tagged as: Index, What is?