A price index (introduced by The Economist in 1986) that uses the McDonald’s Big Mac sandwich as a bundle of goods consistent or invariable across the globe, for the purpose of calculating implied purchasing power parity (PPP) exchange rates for different countries. This index is quite similar to conventional consumer price indexes (CPIs) as it assigns particular weights to each component in the Big Mac (the weights are almost identical across countries).

The commodity bundle or the sandwich content is made up of two all-beef patties, cheese, lettuce, pickles, onions, and special sauce, all assembled within a sesame seed bun. However, what makes this index more realistic is that McDonald’s relies on locally-produced supplies for the components of its Big Mac, and as such it is able to reduce shipping costs to a minimum. Calculation of implied PPP for various countries relative to the dollar is carried out by relating the local currency price of the Big Mac to its average dollar price in four American cities.

This index is also known as Big Mac Index or Big Mac PPP.

For more, see: MacPPP-an example.