The Big Mac index was introduced in The Economist in September 1986 by Pam Woodall as a semi-humorous illustration of PPP and has been published by that paper annually since then. The theory underpinning the Big Mac index stems from large big mac meal concept of PPP, which states that the exchange rate between two currencies should equalize the prices charged for an identical basket of goods.
However, in reality, sourcing an identical basket of goods in every country provides a complex challenge. The purpose of the Big Mac index is to calculate an implied exchange rate between two currencies. Typically, the base country used is the United States. In Switzerland, a Big Mac costs 6. The implied exchange rate is 1. The implied exchange rate according to the Big Mac index is 1. The actual exchange rate is 0.
The Swiss franc is overvalued by 20. The Economist sometimes produces variants on the theme. For example, in January 2004, it showed a Tall Latte index with the Big Mac replaced by a cup of Starbucks coffee. However, this theory can be criticised for ignoring shipping costs, which will vary depending on how far the product is delivered from its “single place” of manufacture in China. Billy index where they convert local prices of IKEA’s Billy bookshelf into US dollars and compare the prices. A Swiss bank has expanded the idea of the Big Mac index to include the amount of time that an average local worker in a given country must work to earn enough to buy a Big Mac.
In 2017, the comparison platform Versus did a version called The Chai Latte Global Index, comparing Starbucks Chai Latte prices worldwide, by first converting the local prices into USD. Global personal finance comparison website, Finder. Starbucks Index in 2019, which analyzed coffee prices for a tall latte in 76 countries and autonomous regions around the world. The report included a Latte Line, which measured the correlation between the price of coffee and a country’s GDP. In 2022, Trusaic, a provider of equal pay compliance software, unveiled a new online tool called The Big Mac Pay Gap Index, which shows how much more a Big Mac would cost you, after adjusting the menu price of a Big Mac to reflect whatever pay gap you may face. This section needs additional citations for verification.
Please help improve this article by adding citations to reliable sources. While economists widely cite the Big Mac index as a reasonable real-world measurement of purchasing power parity, the burger methodology has some limitations. In addition, there is no theoretical reason why non-tradable goods and services such as property costs should be equal in different countries: this is the theoretical reason for PPPs being different from market exchange rates over time. In some markets, a high-volume and low-margin approach makes most sense to maximize profit, while in others a higher margin will generate more profit. Thus the relative prices reflect more than currency values.