#1376 1986 · The Economist · Publishing / economic analysis
The Economist made exchange rates legible with one burger sold the same everywhere
the problem
Purchasing power parity is invisible to readers: abstract, unobservable, and boring to explain
background
Whether a currency is over- or under-valued rests on purchasing power parity — what an equivalent basket of goods costs at home versus abroad — a concept that is technically crucial, statistically slow (formal international price comparisons arrive years late), and incomprehensible to lay readers.
In 1986 The Economist began publishing a running comparison of Big Mac prices around the world: one identical, locally made, globally distributed product whose local dollar price works as a one-item basket, making PPP deviations — overvalued and undervalued currencies — visible at a glance, on a fixed publication rhythm.
what everyone would do
Publish formal PPP estimates with methodology notes — accurate, slow, and unread outside the profession; the proxy's speed and legibility were the point, not precision.
what they saw
Nobody can see purchasing power, but anyone can read a menu. Price one comparable object the world already standardizes, and the abstraction acquires a price tag — self-updating, on schedule, forever.
the move
The index divides each country's Big Mac price by the US price to get an implied PPP exchange rate, then compares it with the actual rate: currencies where the burger costs more dollars than implied look overvalued, less looks undervalued. Central-bank economists Pakko and Pollard later tested it formally and found it performs nearly as well as comprehensive international price comparisons, with deviations from McParity behaving as PPP theory predicts.
why it works
PPP is invisible because baskets are statistical constructions; a Big Mac is a physical object with local wages, rents and ingredients baked in — a genuine one-item basket that McDonald's standardizes for free. The fixed publication rhythm builds the time series that makes it useful, since changes matter more than levels; the tongue-in-cheek framing disarms the experts who would otherwise kill it, while formal testing — it tracks comprehensive indices — earns it standing; and its simplicity makes it viral in classrooms, so each generation of students re-teaches it.
the payoff
The index has run since 1986 on one product's prices; formal analysis finds it performs nearly as well as comprehensive price indices
where it breaks
It fails where McDonald's is absent or prices against local competition, and taxes, rents and traded inputs distort the comparison — the standard caveats in the literature. A single good misleads where relative prices differ structurally, as cheap labor makes services cheap alongside partly-traded burger inputs. And fame invites misuse: quoted as a serious verdict on misalignment, precisely the use its inventors framed as a joke.
what came after
Burgernomics entered textbooks and hundreds of research papers; the index became economics' most-cited popular proxy, spawned imitators across products and indicators, and remains a recurring editorial asset The Economist re-prices on schedule decades later.
references
- [1]The Big Mac IndexThe Economist, 2024economist.com
- [2]Borders and Big Macs (Dallas Fed Working Paper 95)Federal Reserve Bank of Dallas, 2011dallasfed.org