Big Mac Index

From Reuters Financial Glossary

A light-hearted index devised by The Economist magazine which compares the price of McDonald's Big Mac burgers, a fast food staple available around the world, as a guide to whether currencies are overvalued or undervalued. It's based on the assumption that similar goods should cost the same wherever they are purchased. If the prices are different there is an anomaly in the valuation of the local currency. For example, if a Big Mac costs $1 in Washington and 20 pesos in Ruritania then the dollar/peso exchange rate should be 20 pesos to the dollar. If it's out of line then the peso is either overvalued or undervalued on the basis of purchasing-power parity, which says exchange rates should move towards a level which equalizes the price of an identical basket of goods. Critics say the Big Mac index ignores the effects of taxes, profit margins and the price of raw materials in different countries.