1. Base country
Example: how far can USD 100 go?
Price in base currency.
2. Country A
Foreign currency per 1 base currency.
3. Country B
How students should read this:
Do not memorise numbers. Focus on the logic: market exchange rate converts money; PPP exchange rate compares prices.
Do not memorise numbers. Focus on the logic: market exchange rate converts money; PPP exchange rate compares prices.
Imagine you have USD 100.
You can spend it at home, or exchange it and buy Big Macs overseas. PPP asks whether exchange rates reflect the real cost of buying the same thing in different countries.
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PPP rate = “fair burger exchange rate”
It is the exchange rate that would make a Big Mac cost the same after currency conversion.
1
Convert the moneyUse the market exchange rate to see how much foreign currency you get.
2
Buy Big MacsDivide the converted money by the local Big Mac price.
3
Compare with PPPIf the market rate is above the PPP rate, your money buys more burgers there.
PPP rate: Country A
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PPP rate: Country B
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Best burger power
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Change the values on the left to see the conclusion update instantly.
Who gets the most Big Macs?
Comparison table
| Country | Money after exchange | Big Macs affordable | PPP rate | Currency signal | Student explanation |
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Worked example
Exam-ready explanation: Purchasing Power Parity states that, in the long run, exchange rates should move so that the same basket of goods costs the same across countries. The Big Mac Index uses one burger as a simple basket. It helps show whether a currency may be overvalued or undervalued, but it is only a rough guide because one product cannot fully represent a country’s cost of living.
Remember: Higher Big Mac purchasing power does not automatically mean a country has a higher overall standard of living. It only shows that this specific product is cheaper relative to the exchange rate.