Big Mac Index explained: using the Big Mac Index in trading

The Big Mac Index is a common measure of exchange rates, but can it be used to make trading decisions? Find out what the Big Mac Index is and how it works.

What is the Economist’s Big Mac Index?

The Big Mac Index was created by The Economist in 1986 as a way of measuring purchasing power parity (PPP). It started as just a humorous way of explaining the economic theory, but it’s now a recognised exchange rate evaluation technique.

PPP states that there is a theoretical exchange rate that would allow you to buy the same amount of goods and services in every country. So, the real exchange rate should equalise the prices charged for a basket of goods.

In this case, the basket of goods is a McDonald's Big Mac – the fast-food chain’s most well-known product. A Big Mac uses the same ingredients in most countries (meat, bread, cheese, lettuce and onions), making it an easy comparison.

For example, if a Big Mac costs £3.79 in the UK, it should cost $4.67 in the US – based on a USD/GBP exchange rate of 1.23 (at the time of writing).

How to calculate the Big Mac Index

The Big Mac Index is calculated by finding the price of the iconic burger in each country’s currency. It then divides the burger’s price in one currency by its price in another country. This gives the implied exchange rate.

See the Economist’s Big Mac Index

What does the Big Mac Index show?

The Big Mac Index shows the price of the iconic burger in different currencies, which gives us a baseline for what the exchange rate should be. This can then be used to judge whether a currency is over or undervalued by comparing the implied rate and the real exchange rate.

As the real exchange rate is driven by market forces of supply and demand, it can vary considerably from the fundamentals of a currency’s value.

For example, as of January 2023 a Big Mac cost £3.79 in the UK and $5.36 in the US. This implies an exchange rate of 1.41, but the actual rate at the time was 1.23. So, it can be argued the US dollar was overvalued by 14.8% at the time.

Here’s a table of the Big Mac Index data, as of January 2023, showing currencies against the British pound.

Sources: McDonald’s; Refinitiv Datastream; IMF; Eurostat; LebaneseLira.org; Banque du Liban; The Economist

How to use the Big Mac Index in trading

The Big Mac Index has its uses in economics, but it can give traders some insights into market movements too. It’s important to note that it’s not an exact science, but it works the same way as attempting to predict stock market corrections.

In theory, an undervalued asset will rise to its true price over time, and an overvalued asset will revert down.

So, if a currency is overvalued on the Big Mac Index, it’s likely the actual exchange rate will correct to reflect the cost of goods over time. This won’t happen instantly, so the index isn’t useful over the short or medium term but can give insights into longer-term trends.

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Is the Big Mac Index a good measure of PPP?

The Big Mac Index is seen as a good method of measuring PPP because, in theory, a Big Mac is the same in each country. So, the ingredient list provides an accurate and identical basket of goods to measure.

It’s also a good metric given that McDonald’s can be found in nearly every country, so the Big Mac Index can measure PPP where other reliable indices or official data aren't available.

However, in practice, Big Macs aren’t necessarily a perfect identical basket. They’re marketed differently and can even be made differently in different parts of the world. For example, in predominantly Hindu India, there are no beef burgers so a Big Mac there is the chicken Maharaja Mac.

Big Mac Index alternatives

There are a lot of Big Mac alternatives that measure baskets of goods – and therefore PPP. Some are more serious indices from reputable data sources, while others are more humorous – as the Big Mac was intended to be.

Examples include:

• Consumer Price Index – the CPI is a widely used measure of PPP. Each country has its CPI index that tracks the price of a weighted average market basket of consumer goods and services purchased by households in the given economy. The data is released periodically by each nation’s statistics agency. For example, The US CPI is released by the Bureau of Labor Statistics, while the UK CPI is released by the Office of National Statistics
• Tall Latte Index – this index was another creation from The Economist. It works in the same way as the Big Mac Index but follows the price of Starbucks’ Tall Lattes instead. It’s a much smaller data point than the Big Mac Index though, as it only compares the US dollar price against 16 other currencies