Why a Big Mac Costs What It Does

In September 1986, The Economist printed a one-page item called "Burgernomics" as a gentle joke about purchasing power parity theory. The claim of PPP is that over the long run, exchange rates adjust so the same basket of goods costs the same in any country. The magazine picked a Big Mac — a standardized product sold in nearly every country, with roughly identical recipe and preparation — and compared prices.

The joke outlived the author. The Big Mac Index is now updated twice a year. In January 2024, a Big Mac cost $5.69 in the United States. The same burger cost 6.50 Swiss francs ($8.17), 49 Mexican pesos ($2.87), 23 Chinese yuan ($3.24), and 85 Egyptian pounds (about $2.00 after several currency crises). By the raw math, the Swiss franc looks 44% overvalued against the dollar; the Chinese yuan 43% undervalued.

The index isn't a serious exchange-rate predictor. It ignores that labor, rent, and distribution costs differ across countries, and a burger is tradable only locally. Real purchasing-power-parity calculations use a broader basket. But the Big Mac Index gets at something real: the divergence between nominal exchange rates and what money can actually buy on the ground.

Academic economists have taken it more seriously than The Economist probably intended. Robert Cumby's 1996 paper in Economics Letters showed that Big Mac prices, reverted to a long-run mean, track real exchange rates better than many elaborate proxies. The Big Mac Index is a quick sanity check: a country pegging its currency above what its internal prices support will show as overvalued in burger terms, sometimes by 50%. The peg eventually breaks. An index that began as a joke has predicted half a dozen currency collapses.