Big Mac Index: What It Is and How It Is Calculated.

The economy is quite complex, but multifaceted. That is, within many economic processes, there are additional mechanisms. For example, the Big Mac index is what it is and how it is calculated, for instance, in 2025. Besides understanding what it is, one should know how the Big Mac index works (how its value is calculated). 

It is also necessary to understand that the 2024 Big Mac index may differ from the same indicator in 2025. In other words, overall, all investors need to understand what the Big Mac index is. 

What is the Big Mac index and how does it work? 

In the global economy, there are both official and informal indicators. As for the Big Mac index, it serves to assess the purchasing power parity (PPP) of currencies of different countries. This indicator was created back in 1986. Its full creator can be considered the magazine The Economist. The name is also based on the price of the popular McDonald's sandwich, and it began to be used as a baseline value. In 2024, the Big Mac Index continues to remain a simple and visual way to understand how adequate currency exchange rates are relative to their actual purchasing power. It is an interesting and quite important indicator. 

The idea of the index originated as a joke, but soon it became a valuable tool for economic analysis. Thus, gradually, the joke grew into something more significant and understandable. This indicator has also become stable. 

The Economist proposed using the price of the Big Mac, as this product:

1. Is sold in many countries around the world.

2. Is produced according to a standard technology and from similar ingredients.

3. Includes costs for labor, raw materials, rent, and other elements reflecting local economic conditions.

The index quickly gained popularity due to its simplicity and accessibility. It also remains relevant and is calculated every year. 

How can the Big Mac Index be calculated?

Besides the existence of such an indicator, it is also different. This occurs every year. It serves as a sort of comparison that allows comparing different values. The calculation of the index is based on comparing Big Mac prices in different countries, recalculated according to the current exchange rate. The calculation algorithm looks as follows:

1. For each indicator, you need to choose a base currency. For example, in Ukraine, a Big Mac costs 85 hryvnias.

2. Next, the received value can be converted into dollars. To do this, the current exchange rate is used, for example, 1 USD = 37 UAH. The price in dollars: 85 UAH / 37 = 2.30 USD.

3. Next, you need to compare the received price with the price in the USA. If the price of a Big Mac in the USA is 5 USD, then the Ukrainian hryvnia is undervalued.

This is a simple and understandable calculation. Also, the result shows how undervalued or overvalued the currency is relative to the US dollar.

How to calculate such an indicator for Ukraine? 

Suppose the price of a Big Mac in Ukraine is 85 hryvnias, while the exchange rate to the dollar is 37 UAH/USD. The price of a Big Mac in the USA is 5 USD. Let's calculate the value of the Ukrainian Big Mac in dollars: 85 UAH / 37 = 2.30 USD. Then we determine the deviation: (2.30 / 5) - 1 = -0.54 (-54%). This means that the Ukrainian hryvnia is undervalued by 54% relative to the US dollar according to the index. 

What are the advantages of such an indicator? 

Such an index has its advantages as well as significant drawbacks. Overall, the Big Mac index is a useful tool for comparing the purchasing power of currencies, but it has its limitations. The advantages are: 

1. It is a simple and understandable indicator. The index is easy to calculate and is clear even to people without an economic education.

2. The index is quite universal and is often used (in many countries). The McDonald's product is sold in most countries, which provides global coverage. The index also reflects not only the currency exchange rate but also the price level in the country.

Such an index has its limitations. What is being said about: 

1. There are so-called local factors. The prices for Big Macs may depend on taxes, rent prices, wage levels, and other local factors.

2. Also, the indicator does not fully reflect the economic condition of different countries. The index only considers one product, which makes it less accurate for analyzing complex economic processes.

3. This indicator is also influenced by multinational companies. McDonald's can set prices in different countries based on its strategy rather than actual economic conditions.

A few words should be said about where such an index is used. What does this involve: 

1. Assessment of purchasing power parity (PPP). Helps determine how adequate the official exchange rate is.

2. Economic analysis. The index serves as an indicator of economic stability and inflation level. 

3. Financial planning. Useful for companies and investors working in international markets.

Overall, the Big Mac Index is a visual and accessible tool for assessing purchasing power parity of currencies.