If you have ever eaten at a McDonald’s restaurant, you have probably tasted a Big Mac. Interestingly, this burger is not only one of the fast-food franchise’s most popular menu items, but it is also used by financial experts as an economic indicator.

The Big Mac Index was devised in 1986 by the British business magazine, The Economist. The purpose of the index was to illustrate the concept of purchasing power parity (PPP)* in a simple way.

In economics, purchasing power parity is a measure that compares the cost of buying goods in different countries. Since the Big Mac is available all around the world and is made from mostly the same ingredients everywhere, economists can use this burger to compare the purchasing power of different currencies.

For example, let’s say that a Big Mac in the United States costs 5 dollars and 69 cents. According to the current exchange rate, that same burger should cost 8,284 won in South Korea. However, the actual cost of a Big Mac in Korea is 5,806 won, or 3 dollars and 99 cents. What this means is that the same amount of money gets you more Big Macs in Korea than in the U.S.

Additionally, economists can use the Big Mac Index to determine if a currency is overvalued or undervalued. Investors can then use this information to buy or sell bonds and securities that are sensitive to inflation.

But although the Big Mac Index is a handy shortcut for assessing purchasing power parity, economists point out that it has its limitations. For starters, local factors like labor costs, import fees, and tax policies have a greater influence on price than exchange rates. Secondly, salaries vary widely from country to country, so a cheaper Bic Mac on the index might still be more expensive when calculated as a percentage of total earnings.

Despite its shortcomings, the Big Mac Index is still a great starting place to learn about purchasing power parity.

* purchasing power parity (PPP) 구매력평가지수