The Big Mac Index

In September 1986, The Economist published a short, playful article comparing the price of a Big Mac hamburger in different countries. The writer, Pam Woodall, wanted to explain a serious economic idea in a simple way. That idea is called purchasing power parity.

Purchasing power parity suggests that, over time, exchange rates should move toward the level at which the same basket of goods costs the same everywhere. A Big Mac makes a convenient basket. It is sold in many countries, and its recipe is nearly identical in each one. If a burger costs five dollars in the United States but the equivalent of three dollars in another country, the index suggests that the other country's currency may be undervalued against the dollar.

The comparison is easy to understand, which explains much of its popularity. However, it has clear limits. A burger's price depends heavily on local costs that cannot be traded across borders, such as rent and wages. Where workers earn less, food prepared by those workers tends to be cheaper, whatever the exchange rate.

For this reason, economists treat the index as a starting point for discussion rather than a precise measurement. Even The Economist has described it as a light-hearted guide, not a forecasting tool.