The Economist’s “Big Mac Index:” How did this become the best measure for whether foreign exchange rates are honest and not manipulated by the government?

THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level.

 

It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.

 

For example, the average price of a Big Mac in America in January 2016 was $4.93; in China it was only $2.68 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 46% at that time.

 

Source (and awesome interactive map): The Economist