An informal index sometimes used to judge whether current exchange rates are justified. It is based on the theory of purchasing power parity and uses the price of a Big Mac in a particular currency as its indicator – this being one product that is made to an identical specification worldwide. For example, in country A a Big Mac costs 2.50 units of currency Z whereas in country B it costs 5.40 units of currency Y. In theory, the result of Z/Y (in this case 2.50/5.40 = 0.46) should equate to the number of units of currency Z that can be exchanged for one unit of Y. If the current rate is (say) 0.7:1, then currency Y is significantly overvalued.
Subjects: Financial Institutions and Services.