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The Big Mac index was introduced in The Economist in September 1986 by Pam Woodall as
a semi-humorous illustration and has been published by that paper annually since then. The
index also gave rise to the word burgernomics.

UBS Wealth Management Research has expanded the idea of the Big Mac index to include
the amount of time that an average worker in a given country must work to earn enough to
buy a Big Mac. The working-time based Big Mac index might give a more realistic view of
the purchasing power of the average worker, as it takes into account more factors, such as
local wages.

One suggested method of predicting exchange rate movements is that the rate between two
currencies should naturally adjust so that a sample basket of goods and services should cost
the same in both currencies (PPP). In the Big Mac index, the basket in question is a single
Big Mac burger as sold by the McDonald's fast food restaurant chain. The Big Mac was
chosen because it is available to a common specification in many countries around the world
as local McDonald's franchisees at least in theory have significant responsibility for
negotiating input prices. For these reasons, the index enables a comparison between many
countries' currencies.

The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a
Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its
currency). This value is then compared with the actual exchange rate; if it is lower, then the
first currency is under-valued (according to PPP theory) compared with the second, and
conversely, if it is higher, then the first currency is over-valued.

The Big Mac (and virtually all sandwiches) varies from country to country with differing
nutritional values, weights and even nominal size differences.

Not all Big Mac burgers offered by the chain are exclusively beef. In India ² which is a
predominantly Hindu country ² beef burgers are not available at any McDonald's outlets.
The chicken Maharaja Mac serves as a substitute for the Big Mac.

There is a lot of variance with the exclusively Beef "Big Mac": the Australian version of the
Big Mac has 22% fewer calories than the Canadian version, and is 8% lighter than the
version sold in Mexico.

In October 2009, it was reported that all three of the McDonald's in Iceland would be closing
primarily due to the chain's high cost of importing most of the chain's meat and vegetables
from the Eurozone. At the time, a Big Mac in Iceland cost 650 krona ($5.29), and the 20%
price increase that would have been needed to stay in business would have increased that cost
to 780 krona ($6.36).

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The burger methodology has limitations in its estimates of the PPP. In many countries, eating
at international fast-food chain restaurants such as McDonald's is relatively expensive in
comparison to eating at a local restaurant, and the demand for Big Macs is not as large in
countries like India as in the United States. Social status of eating at fast food restaurants like
McDonald's in a local market, what proportion of sales might be to expatriates, local taxes,
levels of competition, and import duties on selected items may not be representative of the
country's economy as a whole.

In addition, there is no theoretical reason why non-tradable goods and services such as
property costs should be equal in different countries: this is the theoretical reason for PPPs
being different from market exchange rates over time. The relative cost of high-margin
products, such as essential pharmaceutical products, or cellular telephony might compare
local capacity and willingness to pay, as much as relative currency values.

Nevertheless, economists widely cite the Big Mac index as a reasonable real-world
measurement of purchasing power parity.

McDonald's is also using different commercial strategies which can result in huge differences
for a product. Overall, the price of a Big Mac will be a reflection of its local production and
delivery cost, the cost of advertising (considerable in some areas), and most importantly what
the local market will bear - quite different from country to country, and not all a reflection of
relative currency values. In some markets, a high-volume and low-margin approach makes
most sense to maximize profit, while in others a higher margin will generate more profit.
Thus the relative prices reflect more than currency values. For example, a hamburger
sandwich costs only ¼1 in France, and ¼1.50 in Belgium, but overall, McDonald's restaurants
are cheaper in Belgium.

Also prices of Big Macs can also vary greatly from different areas of a country; a big mac in
New York City will be more expensive than a Big Mac in a suburb an hour away.

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Granted, the Big Mac Index is far from perfect. Because of varying labor and input costs, the
Index is most valuable when comparing countries at roughly the same stage of development.
But for all of its weaknesses, the Big Mac Index has caught on among investors as a
shorthanded way of looking at PPP across the world's economies. The table below --
reproduced from the u

 -- shows by how much, in Big Mac PPP terms, selected
currencies were over or undervalued at the end of July.
Only a handful of currencies are within 5% of their Big Mac PPP value -- among them places
as far flung as Uruguay, Turkey, Peru, New Zealand, Japan, Israel, Australia and Costa Rica.
At the same time, thanks to the depreciation of the British pound and the euro and the
appreciation of the Japanese yen, the PPP values among the most-traded currencies in the
world are about as in line as they have been in recent memory.

As usually has been the case, the most overvalued currencies are in Western Europe. The
most undervalued ones are in both Asia and Eastern Europe. Two years ago, the euro was
overvalued by a massive 50% compared to the U.S. dollar. After a massive correction in the
euro this year, today that figure is down to 16%. A similar fate has befallen the British pound,
which is undervalued for the first time in recent memory.

Other European currencies remain strong. The Swiss franc is overvalued by 68% against the
dollar. As a group, the Scandinavian currencies are by far the most overvalued currencies in
the world. A Big Mac in Oslo, Norway, will cost you twice as much as in the United States,
with its currency overvalued by 93%. Sweden has retained its reputation as being expensive,
with its currency 76% overvalued. Denmark is Scandinavia's bargain. Its currency is only
31% overvalued -- a substantial drop from last year, as it is de facto linked to the euro.

Asia is the region where those who earn their money in U.S. dollars find a bargain when
buying a Big Mac. Although the Japanese yen has risen substantially to hit fair value, the
Singapore dollar remains undervalued by 18% and the South Korean won by 24%. The Big
Mac Index also makes clear the reasons for the Asian export boom. Hong Kong, Malaysia,
the Philippines and Thailand remain about 40% undervalued -- though they are more
expensive than they were a year ago. The currencies of less well-off Asian countries, such as
Indonesia and Thailand, are equally cheap.

The Chinese Yuan remains 48% below its PPP rate -- the recent ³flexibility´ of the Chinese
government¶s approach to the Yuan notwithstanding. A Big Mac costs $1.95 in China at
current exchange rates versus $3.73 at your local mall in Ohio. No surprise that China's cheap
currency acts as a massive subsidy to Chinese exports.

What about the other BRIC economies besides China? The Big Mac Index omits India
altogether. (Because Hindus do not eat beef, India's version of the Big Mac -- the Maharaja
Mac -- is made of chicken.) Visitors to Moscow -- one of the most expensive cities in the
world -- will be surprised to learn that Big Macs still are 38% cheaper there than in Chicago.
The appreciation of the Brazilian real during the past few years has made it 31% overvalued
and made Brazil one of the most expensive places on the planet to buy a Big Mac.

Most remarkable is how quickly Eastern Europe's cost advantages shifted over the past
couple of years. Two years ago, a Big Mac cost more in Budapest, Hungary, than it did in
London. Today, that position has reversed. In fact, the Baltic countries (Latvia, Lithuania and
Estonia) and Poland are almost as cheap as Asia -- though Hungary and the Czech Republic
remain more in line with Western Europe.

Latin America is a mixed bag. This year, Argentina claimed the title of most undervalued
currency in the world (from China), and Mexico is very cheap. At the same time, as noted,
booming Brazil has one of the most overvalued currencies in the world.
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So, if you were running a currency hedge fund, what would the Big Mac Index tell you to
trade? Among the big six of the currencies traded by foreign exchange traders, the Swiss
franc is one of the only major currencies significantly off kilter with their purchasing power
parities. But the explosion of new currency ETF offerings affords you an opportunity to bet
on some less mainstream currencies as well.

Looking purely at the Big Mac Index, you'd buy the Chinese Yuan (CYB) (48%
undervalued), the Russian ruble (FXR) (38% undervalued), the South African rand (34%
undervalued) and the Mexican peso (FXM) (33% undervalued). You'd sell the Swiss franc
(FXF), the Swedish krona (FXS) and the Brazilian real (66%, 78% and 31% overvalued,
respectively).

But India doesn¶t figure on the Big Mac Index although Pakistan and Sri Lanka do. Why?

# Because there aren¶t too many McDonald¶s outlets in India?

# Because McDonald¶s isn¶t doing too well in India despite its trade-marking the AlooTikki?

# Because our per capita consumption of Big Macs is too low to register on the Richter scale?

# Because not too many Indians know that a hamburger isn¶t made of pork?

# Because2
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 doesn¶t want to insult vegetarians in the world¶s largest democracy?