McDonald's and Data Analytics: The Big Mac Index

After almost a month of nationwide closures, McDonald's is finally back!

We know the brand for its accessible fast food, but did you know that McDonald's also plays an important role in economics?

Created by The Economist in 1986, the Big Mac Index uses the prices of Big Macs to estimate Purchasing Power Parity (PPP) across the globe.

A big mac
The Big Mac plays an important role in estimating Purchasing Power Parity across different countries.

As a refresher, PPP compares currencies based on the prices of a fixed basket of goods.

It can be really difficult to choose this basket of goods, especially when cultural differences make certain goods more popular or prominent than others.

Although the Big Mac Index has its limitations, the Big Mac's ubiquity and relative consistency across countries make it easier for economists to compare PPP across different countries; 118 out of 195 countries, or 61% of all countries, have at least one McDonald's franchise.

In other words, an exchange rate is estimated based on the price of a Big Mac in two countries – a target and base country.

This is then compared to the actual exchange rate between the target and base currency; base currencies are typically the US dollar (USD), but have expanded to other major currencies (namely the Euro, British pound, Japanese yen and Chinese yuan).

Let's take the Singaporean dollar (SGD) as an example.