This is especially useful in countries where price indices are unreliable or unavailable. It can also be used to determine the rate of inflation by comparing the price of a Big Mac from different years.This gives a more realistic picture of the purchasing power of the workers by including local wages. UBS Wealth Management expanded the index by including the number of hours that an average worker must work to buy a Big Mac.However, they were not, which means that in January 2014, the yuan was undervalued against the dollar by 40.6% ((6.05-3.59)/6.05 = 40.6%)Īpart from deciding whether a currency is overvalued or undervalued, economists also use the Big Mac Index in different ways. If the exchange rate was in equilibrium, these two figures should be the same.The market exchange rate at the time was $1 : ¥6.05.The price of a Big Mac was ¥16.60 in China.The price of a Big Mac was $4.62 in the US.

We can compare the US Dollar and the Chinese yuan using the figures produced by the Economist in January 2014. By comparing the Big Mac PPP and the market exchange rate, economists can estimate whether a currency is overvalued or undervalued. It was chosen because McDonald’s is almost present in every country in the world and the ingredients of making a Big Mac stay pretty much the same.Īccording to PPP theory, a Big Mac should cost the same in every country. The basket of goods in this case is a Big Mac. The Big Mac index was first used by The Economist in 1986 as an informal guide to purchasing power parity (PPP).

Average cost of a big mac