Developed by The Economist, the Big Mac is dubbed “the world’s most accurate financial indicator based on a fast-food item.”
The indicator is based on the theory of purchasing-power parity, which is the notion that one dollar should buy the same amount of product in every country. The Economist suggests that in the long run, the exchange rate between two countries should reach equilibrium, and the ability to buy the same items in each country should remain in-sync.
The Economist selected the Big Mac for its ubiquity — it is sold in about 120 countries. The index, however, only lists Big Mac PPP levels in 34 currency zones, according to their most recent report. The comparison of actual exchange rates with the Big Mac’s purchasing power parity ostensibly sheds light on whether a currency is under- or over-valued. The Economist provides a thorough history of its index on its Web site.
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