What can a Big Mac tell you about a currency?

A Big Mac can tell you whether a currency is overvalued or undervalued. Because the burger is sold almost everywhere and is largely the same in every country, its price works like a tiny, tasty price comparison. The idea behind it, purchasing power parity, says exchange rates should make the same goods cost the same everywhere. The Economist's Big Mac Index, running since 1986, checks whether they do.

Here's how it works. In July 2023 a Big Mac cost 6.70 Swiss francs in Switzerland and $5.58 in the United States. Divide one by the other and you get a "burger exchange rate" of 1.20 francs per dollar. But the real exchange rate was only 0.87 francs per dollar. By the index, that meant the Swiss franc was overvalued by 38.5%, which is why Switzerland feels so pricey to visitors. At the other end, a Big Mac cost just $2.39 in Taiwan.

The index started as a joke. The journalist Pam Woodall introduced it in 1986 as a semi-humorous way to explain a dry theory, yet it now appears in textbooks and even gave us the word "burgernomics". It has limits, since a burger's price also depends on local production costs, advertising and what customers will pay. But it has teeth too: in 2011 it suggested Argentina was understating inflation, and the government reportedly responded by forcing McDonald's to keep the Big Mac artificially cheap.