What is the Big Mac Index?

The Big Mac index was created by the Economist magazine to measure purchasing power parity between nations, using the price of a McDonald’s Big Mac as the benchmark.

The price of a Big Mac is a good index of inflation because the cost of a Big Mac includes a broad range of inputs such as beef, grains, cheese, lettuce, and also real estate values (a Big Mac is assembled in a restaurant) and labor costs (a Big Mac is assembled by an employee) and even energy prices (a hot grill and trucking supplies to each location).

The Big Mac Index was originally used to compare the value of currencies of different countries because a Big Mac is sold in many different countries and its virtually identical in each location.

A Big Mac was $1.60 USD in 1986 and $5.11 in 2014, this means the price of a Big Mac increased by a rate of almost 8% per year during that time.

What if I could buy the right to a Big Mac in the future? What if I could pay the current cost of a Big Mac for a gift card that enabled me to receive a Big Mac in return, no matter what the future price of a Big Mac was. Seems like this hypothetical gift card would be a good way to hedge inflation.

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