Burgernomics: a big MacT guide to purchasing power parity

Abstract

The theory of purchasing power parity (PPP) has long been a staple of international economic analysis. Recent years have seen the rise in popularity of a tongue-in-cheek, fast-food version of PPP: The Big Mac™ index. In this article, Michael Pakko and Patricia Pollard describe how comparisons of Big Mac prices around the world contain the ingredients necessary to demonstrate the fundamental principles of PPP. They show that the Big Mac index does nearly as well as more comprehensive measures of international price comparisons and that deviations from “McParity” illustrate why PPP often appears not to hold as a practical matter.Purchasing power parity