Editing Big Mac Index (section)

== Overview ==
[[File:BigMacCroatia.jpg|thumb|upright|A McDonald's Big Mac hamburger]]
The Big Mac index was introduced in ''[[The Economist]]'' in September 1986 by Pam Woodall<ref>{{cite news |url=http://www.economist.com/mediadirectory/pam-woodall |title=Pam Woodall |newspaper=The Economist |date=9 June 2011 |access-date=30 August 2013 |archive-date=16 October 2014 |archive-url=https://web.archive.org/web/20141016175719/http://www.economist.com/mediadirectory/pam-woodall |url-status=live }}</ref> as a semi-humorous illustration of PPP and has been published by that paper annually since then. Although the Big Mac Index was not intended to be a legitimate tool for exchange rate evaluation, it is now globally recognised and featured in many academic textbooks and reports.<ref name=":0">{{Cite news |title=The Big Mac index |url=https://www.economist.com/big-mac-index |access-date=2022-04-28 |newspaper=The Economist |language=en |archive-date=5 May 2017 |archive-url=https://web.archive.org/web/20170505094252/https://www.economist.com/big-mac-index |url-status=live }}</ref> The index also gave rise to the word ''burgernomics.''<ref>{{cite news
  | last1 = Daley
  | first1 = James
  | title = Burgernomics: Why the price of a Big Mac may hold the key to better investment returns
  | newspaper = [[The Independent]]
  | date = 6 September 2008
  | url = https://www.independent.co.uk/money/invest-save/burgernomics-why-the-price-of-a-big-mac-may-hold-the-key-to-better-investment-returns-920726.html
  | location = London
  | access-date = 24 August 2017
  | archive-date = 25 February 2009
  | archive-url = https://web.archive.org/web/20090225065427/http://www.independent.co.uk/money/invest-save/burgernomics-why-the-price-of-a-big-mac-may-hold-the-key-to-better-investment-returns-920726.html
  | url-status = live
  }}</ref>

The theory underpinning the Big Mac index stems from the concept of PPP, which states that the exchange rate between two currencies should equalize the prices charged for an identical basket of goods.<ref>{{Cite web |title=What Is the Big Mac index? |url=https://www.investopedia.com/ask/answers/09/big-mac-index.asp |access-date=2022-04-29 |website=Investopedia |language=en |archive-date=29 April 2022 |archive-url=https://web.archive.org/web/20220429001140/https://www.investopedia.com/ask/answers/09/big-mac-index.asp |url-status=live }}</ref> However, in reality, sourcing an identical basket of goods in every country provides a complex challenge. According to the Organisation for Economic Co-operation and Development (OECD), over "3,000 consumer goods and services, 30 occupations in government, 200 types of equipment goods and about 15 construction projects" are included in the current PPP calculations.<ref>{{Cite web |title=Purchasing Power Parities - Frequently Asked Questions (FAQs) - OECD |url=https://www.oecd.org/sdd/prices-ppp/purchasingpowerparities-frequentlyaskedquestionsfaqs.htm |access-date=2022-04-29 |website=www.oecd.org |archive-date=23 April 2022 |archive-url=https://web.archive.org/web/20220423225832/https://www.oecd.org/sdd/prices-ppp/purchasingpowerparities-frequentlyaskedquestionsfaqs.htm |url-status=live }}</ref> In an effort to simplify this important economic concept, The Economist proposed that a single McDonald's Big Mac could be used instead of a basket of goods. A McDonald's Big Mac was chosen because of the prevalence of the fast food chain worldwide, and because the sandwich remains largely the same across all countries.<ref>{{Cite web |title=Big Mac Index |url=https://corporatefinanceinstitute.com/resources/knowledge/economics/what-is-big-mac-index/ |access-date=2022-04-29 |website=Corporate Finance Institute |language=en-US |archive-date=29 June 2022 |archive-url=https://web.archive.org/web/20220629195517/https://corporatefinanceinstitute.com/resources/knowledge/economics/what-is-big-mac-index/ |url-status=live }}</ref> Although a single sandwich may seem overly simplistic for PPP theory, the price of a Big Mac is derived from the culmination of "many local economic factors, such as the price of the ingredients, local wages, or how much it costs to put up billboards and buy TV ads".<ref name=":1">{{Cite web |title=Big Mac Index |url=https://www.thebalance.com/what-is-the-big-mac-index-1978992 |access-date=2022-04-29 |website=The Balance |language=en |archive-date=22 May 2022 |archive-url=https://web.archive.org/web/20220522200832/https://www.thebalance.com/what-is-the-big-mac-index-1978992 |url-status=live }}</ref> As a result, the Big Mac index provides a "reasonable measure of real-world purchasing power".<ref name=":1" />

The purpose of the Big Mac index is to calculate an implied exchange rate between two currencies. In order to calculate the Big Mac index, the price of a Big Mac in a foreign country (in the foreign country's currency) is divided by the price of Big Mac in a base country (in the base country's currency).<ref name=":2">{{Cite web |title=What is the Big Mac index? |url=https://www.ig.com/au/trading-strategies/what-is-the-big-mac-index-180905 |access-date=2022-04-29 |website=IG |language=en-au |archive-date=4 May 2021 |archive-url=https://web.archive.org/web/20210504100936/https://www.ig.com/au/trading-strategies/what-is-the-big-mac-index-180905 |url-status=live }}</ref> Typically, the base country used is the United States.

For example, using figures from July 2023:<ref name=":0" />

# In Switzerland, a Big Mac costs 6.70 Swiss francs.
# In the U.S., a Big Mac costs US$5.58.
# The implied exchange rate is 1.20&nbsp;francs per dollar, that is 6.70&nbsp;francs/$5.58 = 1.20.

Consistent with PPP economic theory, the Big Mac index also provides a method to analyse a currency's level of under/over-valuation against a base currency.<ref name=":2" /> In order to calculate whether a currency is under/over-valued, the implied exchange rate (as defined by the Big Mac index) must be compared to the actual exchange rate. If the implied exchange rate is greater than the actual exchange rate, then the analysed currency is overvalued against the base currency. If the implied exchange rate is less than the actual exchange rate, then the analysed currency is undervalued against the base currency.<ref name=":2" />

For example, using figures for July 2023:<ref name=":0" />

# The implied exchange rate according to the Big Mac index is 1.20&nbsp;francs per dollar
# The actual exchange rate is 0.87&nbsp;francs per dollar
# The Swiss franc is overvalued by 38.5% against the U.S. dollar, that is (1.20-0.87)/0.87 = 38.5%