Big Mac Index
the big mac index has been published annually by the economist magazine since 1986 as an informal way to measure the values of currencies around the world against the u.s. dollar. the index is based on the theory of purchasing power parity, ppp, which states that exchange rates should eventually in the long run adjusts to make a basket of goods in one country cost the same amount as the same market basket of goods in a different country. the economist came up with an item that is sold in a nearly identical form in about 120 countries. it is mcdonald's big mac hamburger. with few exceptions, the ingredients of the big mac are the same around the globe and ? it serves as a convenient market basket of goods. the big mac index is calculated by dividing the local price of a big mac in one country, say china, by the local price of a big mac in another country, say the u.s., in their respective currencies. the resulting value is the big mac index. when compared to the official exchange, the index reflects which currencies are under or overvalued. for example, the big mac index released in january 2014 showed that big mac is sold in china for \9.84 and in the u.s. for $2.74, which implies that the exchange rate, big mac index should be \3.59 for $1.00. but, the actual exchange rate at that time was \6.05 for $1.00. thus, the big mac index suggests that the yuen is undervalued by 40%. while the big mac index is not ?, it gives a good estimate of future exchange rate movements and real change of the rate of inflation and it's been useful for countries where reliable price indices are not available.