Big Mac Index

Different currencies around the world have different purchasing powers. Purchasing power is defined as the amount of goods or service you can buy for the same amount of money. Purchasing power not only varies from country to country, but also varies over a period of time.

The amount of goods you could buy for 10$ now is very different from what you could buy in the 1950’s.

Different countries have different interest rates, budget deficits, inflation/deflation, import/exports, GDP. And all of these factors contribute to different purchasing power.

One common way purchasing power is compared across countries is buy calculating purchasing power parity(PPP). PPP is a measurement done across the world that uses the price of specific goods in each country.

To avoid large errors in this calculation a basket of goods is chosen. The categories include Food and Beverage, Housing, Transportation, Medical Care, Education, Apparel, Recreation etc.

The Economist introduced the Big Mac Index on 1986. This became an informal way to measure the difference in purchasing power in various countries. The Big Mac index is the price of Big Mac in the respective country compared to a reference to give an idea of what the purchasing power of the currency is.

However, the index can only be calculated in countries that have a McDonalds. Another limitation is that the Big Mac Index can end up measuring the local willingness to pay for a fast food burger.