Purchasing power parity on a sesame seed bun.
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Currency values vary from country to country. For example, a dollar spent in the U.S. might not buy the same amount of goods in another country. So, when comparing economies, it isnât enough to just find equivalence between two currenciesâyou have to consider how far that money actually goes.
But how do you compare purchasing power across multiple currencies at once? You start with a common benchmark. One of the simplest benchmarks comes in the form of a popular consumable: the iconic McDonaldâs Big Mac hamburger. This informal benchmark is called the Big Mac index.
What is the Big Mac index?
The Big Mac index is a price index that shows the cost of a Big Mac across more than 50 countries and currencies. Developed by The Economist editor Pam Woodall in 1986 as a lighthearted way to illustrate purchasing power parity (PPP), the magazine has been publishing the index ever since. Its original purpose wasnât to compare burger prices, but to show whether a countryâs currency was overvalued or undervalued against the U.S. dollar.
McDonaldâs flagship burger is served across roughly 60% of the world using the same core ingredientsâa Big Mac in one country is roughly the same in another. This consistency gives the index plenty of breadth, even if itâs lacking in depth.
In other words, the Big Mac index may not be the most comprehensive way to gauge purchasing power, but it can still offer valuable insight into the relative value of currencies and the economies behind them.
Figure 1: BIG MACS ALL OVER THE MAP. As of January 2025, a Big Mac cost, on average, $5.79 in the U.S. Depending on a countryâs exchange rate vs. the dollar and the cost of inputs (e.g., wages, commodities prices, and supply chain dynamics), your burger will cost more, less, or about the same. Switzerland, at $7.99, has the worldâs highest average selling price, while the best Big Mac bargains can be found in Taiwan ($2.38). Data source: The Economist.
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Why compare Big Mac prices?
Understanding Big Mac PPP (aka âBurgernomicsâ) requires a deeper dive into the theory of purchasing power parity. The term âparityâ means the state of being equal, so purchasing power parity simply means equality in buying power.
If all economies and currencies were âon parâ with one another, then a basket of goods worth $10 in the U.S. should be the same in another country. But even then, a basket of grocery items may differ greatly from one country to the next. This is where the Big Mac comes in handy, because no matter where you go, itâs made of the same core components. If youâre old enough to know the jingle, sing along: Two all-beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame seed bun.
Those ingredientsâand the costs to grow, transport, and serve themâreflect the everyday forces that drive purchasing power parity: local wages, supply chains, taxes, and the broader cost of doing business.
In reality, economies are hardly ever equal. Currency values fluctuate, and so do the costs behind each burger. Thatâs why the Big Macâs price can vary widely from one country to the nextâdifferences that reveal whether a currency may be stronger or weaker in real-world terms.
How is the Big Mac index calculated?
The basic idea behind the index is simple. Use the burgerâs price to find what a currencyâs exchange rate should be (its implied exchange rate), and then see how that compares to the actual market rate. Hereâs how itâs usually done (using data from The Economistâs January 2025 Big Mac index data set):
1: Find the implied exchange rate.
Divide the price of a Big Mac in a foreign countryâs currency by the price of a Big Mac in a base countryâs currency (in this case, the United States).
For example:
- In Japan, a Big Mac costs „480.
- In the U.S., a Big Mac costs around $5.79.
- The implied exchange rate („480 ÷ $5.79) is „82.90 per dollar.
2: Compare the implied exchange rate with the nominal market exchange rate.
Subtract the actual exchange rate from the implied exchange rate and divide the balance by the actual exchange rate.
- The Big Mac implied exchange rate is „82.90.
- The actual market exchange rate is „154.15.
- The Japanese yen is undervalued by about 46% against the U.S. dollar: (82.90 â 154.35) Ă· 154.35 = -0.4629.
3: Interpret the result.
Because the implied rate (82.90) is lower than the actual rate (154.15), the yen buys fewer dollars in the real market than it should, based on the Big Mac price comparison. According to the Big Mac index, the yen is undervalued by about 46% against the dollar.
What Big Mac prices can reveal about an economy
Whether youâre a traveler, shopper, economist, or simply curious, the index can show how much value your money actually holds in different parts of the world. Here are a few insights it can provide:
- Is a currency undervalued or overvalued? If a Big Mac costs much less in a given country relative to the U.S., it can mean that the currency in comparison may be âcheapâ or undervalued relative to the U.S. dollar, or that the dollar is overvalued.
- How far might your money go in different countries? If Big Macs sell for much more or much less, you can get a sense of which countries generally have cheaper or more expensive goods and services.
- Which countries have higher wages and costs? The price of a Big Mac includes local business costsârent, utilities, employee wages, ingredients, transport, taxes, etc. So the cheaper the Big Mac, the lower the potential cost of doing business. A more expensive burger says the opposite.
- How close are economies to parity? If economies were perfectly efficient, then the same product should have the same cost everywhere. As you can see from the map in Figure 1, such parity doesnât existâbut Big Mac prices can help you measure which countries may come closer than others.
- How do prices change over time? Because the index has been tracked since the mid-1980s, Big Mac prices over time can reveal changes in inflation, wages, supply chain stability, and production efficiency. These changes in Big Mac prices may or may not follow a general price index such as the U.S. Consumer Price Index (see figure 2).
- Is the marketâs exchange rate âfair,â or is something else going on? If the exchange rate is lower or higher than the real-world exchange rate, it tells you that other forcesâlike government intervention, capital controls, or trade imbalancesâmay be at work, holding prices down or pushing them up.
Figure 2: CPI VS. BIG MAC. Although the Big Mac index is published as a global snapshot of purchasing power parity among countries, because The Economist has been publishing it for several decades, the index can also serve as a proxy for consumer inflationâsimilar, but not identical to, the consumer price index in any country thatâs part of the magazineâs data set. Source: The Economist.
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The Big Mac index can also offer a window into global inequality. In some countries, a Big Mac is an affordable lunch, whereas in others, itâs a luxury item. That contrast tells you something about local incomes relative to global pricing. The Big Mac index remains an informal measure, not a comprehensive one. Itâs a fun and revealing tool, but it canât capture every factor behind currency values and living costs.
Limitations of the Big Mac index
There are many granular factors that can affect Big Mac pricing. Here are four to consider:
- It represents a narrow slice of consumer goods. Despite reflecting a chain of input costs like ingredients, wages, rent, advertising, and taxes, a single product canât represent a countryâs entire âbasket of goods,â which needs to include thousands of goods and services to measure differences in consumption and living standards.
- Local production factors play a role in pricing. Some countries may find it cheaper or more expensive to source Big Mac ingredients, which affects the cost of production and, ultimately, the final price.
- Market forces are broader than burger-based factors. Exchange rates are often driven by broad factors such as political stability, investment flows, trade balances, interest rates, and monetary policy. Itâs not certain whether all of these factors will affect Big Mac production.
- Cultural and market differences matter. In some places, the Big Mac is a luxury item; in others, itâs an affordable fast food. This factor limits the indexâs comparability, regardless of the monetary differences.
The bottom line
The Big Mac index is a cleverâand somewhat tongue-in-cheekâway to view global currency valuations and purchasing power parity. It offers quick, intuitive insights into how far money goes around the world. But donât treat a single sandwich as a stand-in for the whole enchilada of consumer inflation and exchange-rate analysisâand definitely not as a reason to place a big trade in the retail forex market.
This article was most recently revised and updated by Karl Montevirgen
