The exchange rates between world currencies can be a little misleading. While they are supposed to show the buying power of one currency versus another, there are many powerful market forces that serve to distort their actual value. So, if you are trying to compare cost levels in different countries, the exchange rate is not going to give you an accurate view. You need the Big Mac Index.
Created by The Economist in 1986, the Big Mac Index attempts to measure what is known as Purchasing Power Parity (PPP), a measure of the relative buying power of currencies. The premise is that a US dollar should buy roughly the same in each country, but to measure this one needs something that is sold in most countries and is the same throughout them all. Enter the ubiquitous Big Mac.
By comparing the price of a Big Mac in various countries, it is possible to get a rough idea of the purchasing power of those countries relative to your own. Economists further use this index to measure whether a currency is overvalued, or undervalued when compared to their actual exchange rate.
The Big Mac Index started off as a fun way of explaining exchange rates, but now, some 28 years later, it is spoken about in both local bars and global economic forums.
