The Big Mac economy
As the GDP per capita of the country increases, the price of the Big Mac also increases.
Big Mac Index
The Big Mac is a standard burger that is sold in all Macdonald’s franchise restaurants across the world at different prices. The prices seem to be adjusted to suit the affordability of the local consumers (amongst other factors) in a particular country.
Theoretically, since the price of a Big Mac has been fixed based on affordability, demand and supply, it may perhaps, to a certain extent be used to compare and justify the currency exchange rate between 2 countries. For example:
The Big Mac is priced in the USA atUS$2.90, The Big Mac’s price in Thailand = Baht 70
Purchasing Power Parity (PPP) = US$2.90/ 70 = 0.0414
Currency exchange rate: 0.0327 US$ = Baht 1 (estimated)
To calculate whether the Thai Baht is undervalued or not against the US dollar:
(0.0327 – 0.0414)/0.0327 x 100% = -26.6%
A negative figure means that the Baht is theoretically undervalued against the US dollar (in this case, by 26.6%).