Published On: Mon, Jan 28th, 2013

Big Mac Index

The Big Mac Index is a term that was coined by the editors of the magazine The Economist.  It was created as a way to graphically and colorfully illustrate the concept of PPP, or Purchasing Power Parity.

Purchasing Power Parity can be used as a measure of how much the cost of living is higher or lower in one country as opposed to its neighboring countries.  Due to economic law, and the fact of free moving capital, labor, and goods and services, when there is a country with a higher cost of living, it is thought that the natural forces of economics and trade will lower force that economy to slow (and the currency to weaken) and the lower cost of living economy to get stronger (and therefore the currency to get stronger.)

In a way to measure cost of living and the strength of an economy, the price of a McDonald’s Big Mac in that country’s currency converted back into USD.  The index shows in graphic form how the essentially the same products (Big Macs) cost in relative terms and can be used to indicate the strength of a currency (and therefore an economy) as compared to other countries currencies (and therefore economies.)

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.