The Big Mac Index is a popular measure of purchasing power parity (PPP) between nations. It was created by The Economist in 1986 as a way to measure whether currencies are under- or over-valued. The index is based on the theory of PPP, which states that exchange rates should adjust so that identical goods cost the same in different countries. In other words, a dollar should buy you the same amount of a good in any country. The Big Mac Index uses the price of a Big Mac hamburger as its measuring stick.
The reasoning behind using the Big Mac as a measure is that it is produced and sold in nearly every country, so it provides a good comparison. The Index shows that the Chinese yuan is currently undervalued by about 25%, while the Swiss franc is overvalued by about 20%.
The Big Mac Index can be used as a tool to help predict future exchange rate movements. If a currency is undervalued according to the index, it may be due for an appreciation. And if a currency is overvalued, it may be due for a depreciation. Of course, there are many other factors that affect exchange rates, so the index should not be used as the only predictor of future movements.
The Big Mac Index is a fun and useful way of looking at PPP between countries. It can help give you an idea of whether a currency is under- or over-valued, and potentially predict future exchange rate movements.