Big Mac index
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
The Big Mac index is an informal test of purchasing power parity (PPP), published by The Economist. PPP says exchange rates should adjust until the same good costs the same everywhere. The index compares the price of a Big Mac burger across countries to judge whether currencies are overvalued or undervalued. Implied PPP rate = local price ÷ US price.
Example
Suppose a Big Mac costs ₹200 in India and $5 in the US. The implied PPP rate is ₹40 per $. If the market rate is much higher than ₹40, the index suggests the rupee is undervalued.
Don't confuse with
- Real effective exchange rate (REER): the REER is RBI's official, trade-weighted measure of competitiveness across a basket of currencies. The Big Mac index uses one product and is only a rough guide.
Related concepts
- Purchasing power parity
- Real exchange rate
- Nominal Effective Exchange Rate
- Real Effective Exchange Rate
- Terms of trade
- Net barter terms of trade
- Income terms of trade
- Dutch disease