TTHE BIG MAC index was invented by The Economist in 1986 as a light guide to whether currencies are at their “correct” level. It is based on the theory of purchasing power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of the same basket of goods and services (in this case , a hamburger) in two countries.
Burgernomics was never intended as an accurate measure of currency misalignment, but simply as a tool to make exchange rate theory more digestible. Yet the Big Mac Index has become a global standard, included in several economics textbooks and the subject of dozens of academic studies. For those who take their fast food more seriously, we also calculate a greedy version of the index.
The GDP-adjusted index responds to criticism that one would expect average burger prices to be cheaper in poor countries than in rich countries because labor costs are lower. The PPP signals the direction in which exchange rates are expected to move in the long run, as a country like China gets richer, but that says little about the current equilibrium rate. The relationship between prices and per capita GDP can be a better indicator of the current fair value of a currency.
To learn more about the Big Mac Index, see “Out of the ordinary: What the Big Mac Index tells you about currency wars”. You can also download the data or read the methodology behind the Big Mac Index here.
Note: The adjusted GDP index was updated in January 2021 to include more countries.