What does the Big Mac index indicate about currencies?

The Big Mac index is an informal measure that compares the price of a Big Mac burger in different countries to assess whether currencies are overvalued or undervalued relative to each other. It is based on the theory of purchasing power parity (PPP), which suggests that in the long run, exchange rates should adjust so that the same amount of goods can be purchased across different countries.

The index uses the price of a Big Mac, which is a standardized product available in numerous countries, to establish a benchmark for comparing currency values. If a Big Mac is significantly more expensive in one country compared to another when converted at the current exchange rate, it suggests that the currency of the country where the burger is more expensive may be overvalued, or that the currency of the cheaper country may be undervalued.

This concept provides a simple, albeit limited, insight into currency valuation, as it focuses on a single item rather than overall economic conditions. Yet, it serves as a useful tool for illustrating discrepancies between actual market exchange rates and what might be expected based on local purchasing power.