Imagine the McDonalds Big Mac as an economic instrument. It has been around since the 1980s and has been used explain currency valuations. The index has now become a global standard and is included in several economic textbooks and the subject of many academic studies.
The Big Mac Index was never intended as a precise gauge of currency misalignment but more as a tool to make exchange rate differences easier to understand. Using an example, the average price of a Big Mac in America in January 2014 was $4.62, whilst in China the same Big Mac was only $2.74. Using the Big Mac index, this indicated that the Chinese Yuan was undervalued by 41% at that time.
The Big Mac Index might help if you ever want to travel to these 42 countries with Dancing Matt.
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