BIG MAC INDEX

Published by “THE ECONOMIST” as an informal way of measuring the purchasing

power parity between two countries currency 1986 as a light hearted guide to

whether the currency are at ‘correct level’

Big Mac PPP is used to measure purchasing power parity between nations, using

price of Big Mac as the Benchmark.

With the Big mac PPP, purchasing power is reflected by price of McDonalds Big Mac

in a particular country. The measure gives an impression of how over valued or

undervalued a currency is.

Big mac was chosen due to common availability of specifications.

Big mac PPP exchange rate between two countries is obtained by dividing price of a

Big Mac (in its home country currency) by the price of a Big Mac (in host Country

currency). This than enables us to know to whether the currency is undervalued or

overvalued.

Average price of Big Mac in America is $4.37 and in china is $2.87 at market

exchange rate. So Big mac index says Yuan undervalued by 41% at that time.