A Joke Currency Index The Economist Started Has Been Cited by the IMF

Pam Woodall, an editor at The Economist, was looking for a way to teach readers about purchasing-power parity in 1986. The theory says that, in the long run, exchange rates should drift toward whatever level makes a given basket of goods cost the same in every country. The basket she chose was one Big Mac.

The first index ran in the September 6, 1986 issue. A Big Mac in the United States cost $1.60. In Tokyo it cost ¥370, which at then-current exchange rates was $2.40 — implying the yen was overvalued by about 50%. In Hong Kong the burger was $1.05, suggesting the Hong Kong dollar was undervalued. The framing was deliberately tongue-in-cheek.

The trick worked because the Big Mac is a near-identical product McDonald's serves in dozens of countries, made from local labour, local rent, local beef. If two currencies are correctly priced and the burger isn't, something is being subsidised — or someone is overpaying.

The joke became durable. The index has been published continuously since 1986 and now covers more than fifty countries. The IMF has cited it in working papers on real exchange rates, and a 2003 Federal Reserve note used it as an entry point into PPP for non-economists. Argentina's government, while disputing official inflation figures in the 2010s, allegedly leaned on McDonald's to keep Big Mac prices low to manipulate the index.

No one would price a currency on a hamburger alone. But for spotting which currencies look mispriced versus their structural fair value, the burger has held up about as well as the more sophisticated baskets economists actually trust.