Purchasing Power Parity and the Big Mac Index

Flashcards on Purchasing Power Parity and the Big Mac Index

Purchasing Power Parity (PPP)

The notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries.

Big Mac Index

Invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their 'correct' level based on purchasing-power parity.

Law of One Price

Related to Purchasing Power Parity and Arbitrage

Arbitrage

Related to the Law of One Price and Purchasing Power Parity

Burgernomics

A tool to make exchange-rate theory more digestible using the Big Mac index.

Overvalued Currency (Euro Area Example - Jan 2025)

In January 2025, the euro was 2.8% overvalued against the US dollar according to the Big Mac Index.

Undervalued Currency (Japanese Yen Example - Jan 2025)

In January 2025, the Japanese yen was 46.3% undervalued against the US dollar according to the Big Mac Index.

Big Mac Exchange Rate

The exchange rate that would equalize the price of a Big Mac in two different countries