Kenneth R. Szulczyk
If the spot exchange rate is 1.4 francs per $1, subsequently, traders use arbitrage. The CPI in
the United States in francs is 1,057.42 (or $755.3 × 1.4 francs per $1), which is smaller than the
CPI of Switzerland. Thus, traders could profit by purchasing a basket of goods from United
States and selling it to Switzerland. Thus, they potentially earn 1,241.20 – 1,057.42 = 183.78
francs per basket of goods.
The Economist publishes the Big Mac Index, based on the Purchasing Power Parity.
McDonald’s sells Big Macs in over 123 countries around the world. The Big Mac requires many
ingredients like beef, buns, lettuce, tomatoes, onions, and its special sauce. Furthermore,
restaurants pay labor, retail space, and utilities like water, electricity, and natural gas.
Consequently, a Big Mac's price correlates to the prices of its inputs, and the inputs represent a
variety of sectors in a country’s economy. Thus, the price of a Big Mac reflects a country’s PPP
that we show for 10 countries in Table 1. Finally, some analysts designed a Starbuck's Index
similarly to the Big Mac Index.
Table 1. The Economist’s Big Mac Index for 2005
Country Big Mac Price
U.S. $
Implied PPP
currency per U.S. $Exchange Rate
currency per U.S. $Over Valued (+)
Under Valued (-)
United States 4.33 - - -
Argentina 4.16 4.39 4.57 - 4 %
Australia 4.68 1.05 0.97 +8%
China 2.45 3.62 6.39 - 43 %
Europe (Eurozone) 4.34 1.21 1.21 0 %
Japan 4.09 73.95 78.22 - 5%
Malaysia 2.33 1.71 3.17 - 46%
Mexico 2.70 8.55 13.69 - 38%
Russia 2.29 17.33 32.77 - 47 %
Switzerland 6.5 6 1.05 0.99 +52
Venezuela 7.92 7.86 4.29 +83%
Source: The Economist Big Mac Index. July 2012. Available from http://www.scribd.com/doc/102253973/Big-
Mac-Index-July-2012 (Access date 9/28/2012).
The Big Mac price is denominated in U.S. dollars, and we convert it to U.S. dollars using
the spot exchange rate. Moreover, the implied PPP is the ratio of a Big Mac's price in the foreign
currency divided by the average U.S. price in dollars. Finally, the exchange rate is the spot
exchange rate on July 25, 2012. Consequently, we could earn a profit by buying Big Macs in
Malaysia for $2.33 and selling the hamburgers in the United States for $4.33. However, we must
pay transportation costs and would experience problems bringing numerous hamburgers through
customs. Furthermore, the Big Macs would not be fresh, and they would quickly spoil before
they reached their destination.
We can calculate the Big Mac easily. For example, the price of a Big Mac in Malaysia
averaged 7.4 ringgits, which is the spot exchange rate multiplied by the Big Mac’s price in U.S.
dollars (or 2.33 × 3.17). If the costs are identical for both Malaysia and the United States, then
the implied PPP value is the Big Mac’s price in ringgits divided by the U.S. price, which equals