Introduced in September 1986 by the Economist magazine, the Big Mac Index has achieved notoriety as a financial indicator. The Index is a humerous guide to whether currencies are at their “correct” level – based on the theory of purchasing-power parity (PPP).
Purchasing-power parity (PPP) is a theory stating that eventually, exchange rates should move towards levels that would equalise the prices of an identical basket of goods and services (in this case the Big Mac) in any two countries.
The Big Mac purchasing-power parity is the exchange rate that would make the hamburger the same price in another country as the US.
The Big Mac Index allows economists to make comparisons of exchange rates and relative prices in countries around the globe. A country’s exchange rate and it’s PPP can be used as a indicator as to whether that currency is over or undervalued.
|Euro Area||Eur 2.94||3.681|
The Tall Latte Index was introduced by the Economist in January 2004, in light of the global span of the Starbucks chain.
It should be noted that purchasing power parity is considered a long run theory of exchange rate determination and the Big Mac is not a tradable good, making the Big Mac Index a less than perfect indicator.