Could you ever imagine? The price of a burger can decide how rich a country is. Yes, you heard that right! The Big Mac is one of the metrics to calculate a country’s purchasing power. The connection may seem quite unlikely, but the Big Mac Index has been using the snack as a barometer of global exchange rates for over 35 years.
Invented by The Economist in 1986, The Big Mac has been a widely acknowledged benchmark for economists to calculate the purchasing power of economies. And it makes good sense. Why? Well, McDonald’s is the world’s leading food chain, with its presence at over 38,000 locations in over 100 countries. So the prices of the native burgers sold in different countries have something to do with their purchasing power.
For example, if a Big Mac costs $4 in the United States and $2 in India, we can say that the US Dollar is relatively weaker than the Indian Rupee. This is because it takes more dollars to buy the same product than it does in rupees. Similarly, if a Big Mac costs $3 in Mexico and $5 in Canada, we can say that the Canadian dollar is relatively stronger than the Mexican peso.
Because it is concise, simple to grasp, and based on a real-world product—in this case, a burger that is accessible in nearly every country—it has grown in popularity as a tool for comparing currency values.
The Big Mac Index does have certain restrictions, though. The fact that McDonald’s is an international firm and works in various ways depending on the country in which it is located is a significant problem. Factors like local taxes, labour expenses, and ingredient availability are a few variables that may have an impact on the pricing of a Big Mac. These variables might differ greatly from one country to another. Also, the Big Mac might not be an accurate representation of the whole range of products and services that consumers in a given nation use.
Despite these drawbacks, the Big Mac Index is nevertheless a helpful tool for comprehending currency values and spotting potential exchange rate differences. It is an original and innovative method of looking at the financial world and has contributed to the rise in popularity of the idea of purchasing power parity (PPP) among investors, economists, and lastly readers like us.
