The Big Mac Index: What hamburger prices can tell us about currencies

What is the Big Mac Index?

Back in 1986, The Economist magazine came up with a clever idea. They started tracking the price of a Big Mac in different countries to see if currencies were fairly valued. Why a Big Mac? Because it's the same burger whether you're in Tokyo, New York or Moscow.

How the index works

It's a brilliantly simple concept. If a Big Mac costs you $5 in the US but only the equivalent of $3 in Japan after converting yen to dollars, something's off. Either the yen is too cheap, or the dollar is too expensive.

That's the essence of the Big Mac Index. It's a real-world test of whether exchange rates make sense. A currency that buys you more burger than it should is probably undervalued.

Real-world example from June 2024:

• Switzerland had the most expensive Big Mac at $7.37
• The US Big Mac price was $5.58
• Uruguay's Big Mac cost $5.17
• India had the cheapest Big Mac at just $2.65

This means the Indian rupee appeared 52% undervalued against the US dollar

What started as a tongue-in-cheek idea has become a genuinely useful tool that traders and economists regularly reference. It takes a complex economic concept and boils it down to something we can all understand – the price of a burger.

Understanding purchasing power parity (PPP)

The Big Mac Index is based on something called "purchasing power parity" or PPP.

The theory behind PPP

PPP is just a fancy way of saying that identical things should cost the same everywhere once you convert currencies. For example:

• If a coffee costs $5 in New York
• It should cost about €4.50 in Paris (if €1 = $1.11)
• And roughly ¥545 in Tokyo (if ¥1 = $0.0092)

When prices don't match up after conversion, it suggests one currency is either too strong or too weak against the other. That's where trading opportunities can emerge.

From theory to hamburgers

The brilliance of the Big Mac Index is that it uses just one product instead of trying to compare hundreds. Economists usually calculate PPP using massive baskets of goods, but The Economist cut through all that complexity with a single burger.

The Big Mac works surprisingly well for this purpose. McDonald's is obsessive about consistency – their burgers are nearly identical everywhere. This eliminates a ton of variables that would otherwise make comparisons difficult.

Plus, a Big Mac isn't just any product. It contains both globally traded ingredients like beef and wheat, as well as local inputs like labour, rent and advertising. That makes it a mini-economy in a sesame seed bun.

How to calculate the Big Mac Index

Now let's look at the actual calculation with some real numbers.

Basic calculation method

The maths is simple:

1. Find what a Big Mac costs in the local currency
2. Convert that to US dollars using current exchange rates
3. Compare it with the US Big Mac price
4. Work out the percentage difference

Real-world example using Singapore

Based on The World Rankings' Big Mac Index data from June 2024:

• A Big Mac in Singapore cost S$6.20
• The exchange rate was: S$1 = US$0.748
• Converting to US dollars: S$6.20 × US$0.748 = US$4.64
• The US Big Mac price was US$5.58
• The calculation: ((US$5.58 - US$4.64) ÷ US$5.58) × 100 = 16.8%

This indicated the Singapore dollar was undervalued by about 17% against the US dollar according to the Big Mac Index as of June 2024.

Alternative calculation method

There's another way to calculate this:

• If a Big Mac cost S$6.20 in Singapore and US$5.58 in America
• The implied exchange rate should be: S$6.20 ÷ US$5.58 = 1.11 Singapore dollars per US dollar
• But the actual exchange rate was 1.34 Singapore dollars per US dollar
• So: ((1.11 - 1.34) ÷ 1.34) × 100 = 17.2% undervalued

Both calculations point to roughly the same conclusion – the Singapore dollar seemed undervalued against the US dollar by around 17%.

The Big Mac Index as a trading tool

You won't find the "Big Mac PPP" indicator on your trading platform, but that doesn't mean you can't use these insights. Here's how these burger economics can help your trading.

Identifying potential currency trends

When a currency is seriously undervalued (say 20% or more), it often strengthens over time¹. Think of it like a rubber band that's been stretched too far – eventually, it snaps back.

The research backs this up too. Currency misalignments typically correct over 3-5 years². That's why this approach works better for longer-term position trades than for quick flips.

The most reliable signals come from comparing similar economies. The PPP theory works best between countries with comparable development levels. Comparing Switzerland to Indonesia? Take those results with a pinch of salt.

Supplementing traditional analysis

Smart traders don't rely on the Big Mac Index alone. They use it alongside:

• Economic growth figures
• Interest rate expectations
• Technical chart patterns
• Trade balance data

The index provides a reality check on currency valuations. When conventional analysis contradicts what the Big Mac Index suggests, it's worth investigating further.

Spotting emerging market opportunities
 

Emerging markets often show the biggest valuation gaps. Places like:

• Vietnam
• Brazil
• India

These countries frequently show significant PPP disparities compared to the dollar or euro³.

Limitations of the Big Mac Index

Like any tool, the Big Mac index has its limits.

Economic simplification

The index makes assumptions that don't always hold true:

• Labour costs vary enormously between rich and poor countries
• Rent, distribution and supply costs differ dramatically
• Tax regimes affect prices differently

Market factors beyond PPP

Currency values don't just depend on burger economics.

Interest rates significantly impact currency movements. If Japan keeps rates at 0% while the US is at 5%, money will flow to the dollar regardless of what the Big Mac Index suggests.

Trade flows affect currencies too. Export-heavy countries tend to see currency appreciation, even if their currency already seems "expensive" by PPP standards⁴.

During market uncertainty, investors tend to favour safe haven currencies like the US dollar and Swiss franc⁵, regardless of PPP considerations.

Political developments and growth expectations also move currencies in ways the Big Mac Index cannot predict.

Data limitations

Then there are the practical problems:

• Not every country has McDonald's
• Pricing strategies vary (premium positioning in some countries, budget in others)
• Local competition affects prices

Despite all these caveats, the Big Mac Index still works surprisingly well for spotting extreme valuation differences⁶.

How to apply these insights in your trading

Let's get practical. How do you actually use the Big Mac Index to inform your trading?

1. Selecting appropriate currency pairs

Focus on the pairs with big valuation gaps. When you see gaps of 15-20%, that's when things get interesting.

Mix long-term PPP views with shorter-term technical setups. While the fundamental PPP imbalance might take years to resolve, you can use technical analysis to time your entries.

Remember that patience pays off here. This isn't day trading – think months and years, not hours and days.

2. Building a comprehensive strategy

Here's how to build a more robust approach:

• Use the Big Mac Index to identify the potential direction
• Check if interest rate trends support or contradict this view
• Look at economic growth forecasts and trade balances
• Set realistic profit targets based on historical PPP reversions

3. Get started with CFDs

Through IG Singapore, you can use CFDs to trade these insights. CFDs allow you to trade using leverage, which means using a smaller amount of initial funds or capital to gain exposure to larger trade positions.

4. Implementing effective risk management
 

Never risk too much on these trades:

• Use stops to protect against adverse moves
• Consider scaling in rather than taking full positions immediately
• Set limit levels based on partial PPP corrections
• Keep position sizes modest – no more than 1-2% of capital per trade

IG's platform gives you access to all the major currency pairs plus dozens of exotic ones, with competitive spreads that won't eat into your PPP-based profits.

Ready to trade currency misalignments?

The Big Mac Index highlights currencies that may be significantly undervalued or overvalued, creating potential trading opportunities.

Create an IG account to access 90+ currency pairs and start trading these opportunities today.

Footnotes

_{¹ Clements, K. W., & Si, J. (2023). "Patterns of Price Convergence Based on the Big Mac Index." Journal of International Money and Finance.}

_{² Taylor, A. M., & Taylor, M. P. (2022). "The Purchasing Power Parity Debate." Journal of Economic Perspectives.}

_{³ James, J., & Marsh, I. W. (2023). "Currency Misalignments in Emerging Market Economies: The Big Mac Index vs. Behavioral Equilibrium Exchange Rate Approach." Journal of International Financial Markets, Institutions and Money.}

_{⁴ Cheung, Y. W., Chinn, M. D., & Qian, X. (2023). "International Trade and the Persistence of Exchange Rate Misalignments." Journal of International Economics.}

_{⁵ Bank for International Settlements. (2024). "Exchange Rate Dynamics During Financial Market Stress." BIS Quarterly Review.}

_{⁶ Pakko, M. R., & Pollard, P. S. (2024). "Burgernomics: A Big Mac™ Guide to Purchasing Power Parity." Federal Reserve Bank Research Papers.}