What exactly is the Big Mac index?
Taking advantage of Mcdonald’s global reach, the Big Mac Index seeks to measure the purchasing power-parity (PPP) of currencies across states. PPP is an economic theory that determines the relative value of different currencies and what adjustments should be made to the exchange rate to achieve equilibrium. Essentially, the idea is based on the law of one price: a bundle of goods should cost the same in any two countries if they are evaluated with the same legal tender.
To put it simply, if I go to McDonald’s in Boston and buy $50 worth of Big Macs (Don’t judge me...I’m hungry) and then I go to a McDonald’s in Tokyo and buy $50 worth of Big Macs (exchanged into Japanese Yen), then I should have the same number of Big Macs. According to the law of one price, if I ended up getting more Big Macs in Japan for my $50, more consumers would purchase Big Macs there, because of the lower price tag. The increased demand in Japan and the decreased demand in the US would drive prices toward equilibrium.
The Economist runs this index over a handful of countries, buying $50 buckets of Big Macs left and right. Unsurprisingly, few buckets have the same number of Big Macs. For instance, as explained in a 2012 price economics article from The Economist, a McDonald’s Big Mac in the US costs approximately 4 dollars and 20 cents, compared to $6.81 in Switzerland. This suggests that the Swiss franc was 62% overvalued in comparison to the dollar. The more important issue, however: who would pay seven bucks for something that is to food what jeggings are to real pants?
Here's the full breakdown from The Economist: