The Big Mac Index is an informal way of measuring of Purchasing power parity (PPP) between two currencies.
Even quite serious economists, such as those from the Federal Reserve Bank of Dallas use it.
The Big Mac: A Global-to-Local Look at Pricing .The premise of the Big Mac Index is the existence of LOP (Eng. Law of One Price)
Burger dollar price should not vary from country to country.
Commodity prices should be the same in both countries observed.
And the main role of the exchange rate is to correct any disproportion.
Exchange rates obtained by purchasing power parity balances cost of goods and services in both countrys.
Price of BigMac in US * Exchange rates = Price of BigMac in observed country.
In one sentence, the Purchasing power parity is Target exchange rate for the observed currency.
Burger method for estimating the PPP has its limitations.
Differences may arise due to transport costs, higher tax rates, labor costs, levels of competition and trade barriers.
Note.
Big Mac Index is not full-blooded counterpart of P.P.P.
Has lower accuracy, but its calculation is simpler.
Genuine PPP requires the use of Data sources, which I do not have available to me.
Euro Dollar target rate using both methods.
Big Mac Index - 1.1035
Purchasing power parity -1,16636
(Data for the last year)