Back in 1986, writers for The Economist came up with a tasty way of measuring purchasing power parity or PPP by comparing the price of a McDonald's Big Mac across different countries. The exercise turned out to be a handy — if not entirely accurate — way of predicting which global currencies were undervalued or overvalued compared to the U.S. dollar [source: The Economist].
Here's how the theory works. In 2011, the price of a Big Mac in China was U.S. $2.27 versus $4.07 stateside. According to the Big Mac Index, that meant that the Chinese yuan was 44 percent undervalued compared to the U.S. dollar. In Brazil, on the other hand, a Big Mac was 51 percent more expensive than in America (at $6.16), making the real wildly overvalued as a global currency [source: The Economist].
Over time, the theory goes, exchange rates should drift toward equality or PPP. That's critical information for folks who trade on the FOREX or foreign exchange market. The Economist is quick to note, however, that Big Mac prices are affected by other factors, most notably wages and cost of living standards, which vary widely in developing countries.