In September 1986, “The Economist” introduced the Big Mac Index, as a semi-humorous illustration of purchasing power parity (PPP). PPP provides a test of the extent to which market exchange rates result in goods costing the same in different countries. The objective was to attempt to make exchange-rate theory a bit more understandable.
PPP can be useful in attempts to predict exchange rate movements in that the rate between two currencies should naturally adjust so that a sample basket of goods and services should cost the same in both currencies. The Big Mac Index simply uses the prices of Big Macs instead of a basket.
The Big Mac Index has other uses. It is an interesting measure of relative prosperity between different countries. Here the calculation is based on how many hours of work, at the local minimum wage, are required to purchase one Big Mac. In the US, for example, approximately 30 minutes of work is required. In some high minimum wage jurisdictions, mainly on the west coast, it takes less than 20 minutes. On the other hand, in some very poor countries, such as Nicaragua and Zimbabwe, it takes nearly two days of work, at the local minimum wage, to earn the price of a Big Mac.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA