One of the greatest challenges for anyone traveling abroad is determining what their purchasing power really is. A drink in one place my cost twice as much in another. Economists wrestle with this issue every day, luckily for the rest of us there is McDonald's and The Economist.
In 1986 The Economist's columnist Pam Woodall created a semi-humorous illustration displaying the Big Mac Index. In this illustration was the value of a Big Mac anywhere in the world. The success of the initial publication has caused The Economist to continue publishing the Big Mac Index every year. With that knowledge any person may travel to virtually any place and know how much a Big Mac costs. The index allows anyone to quickly determine the purchasing power parity between two currencies and exchange rate. An exampled of of the index can be used is:
- the price of a Big Mac was $3.57 in the United States
- the price of a Big Mac was £2.29 in the United Kingdom (Britain) (Varies by region)
- the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56
- this compares with an actual exchange rate of $2.00 to £1 at the time
- [(1.56-2.00)/2.00]*100= -22%
- the pound was thus overvalued against the dollar by 22%
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