"The Big Mac index is The Economist's burger-based measure of whether currencies are over- or undervalued.... [E]xchange rates should eventually adjust to make the price of a basket of goods the same in each country. Our basket contains just one item: the Big Mac hamburger, which is pretty much the
Same around the world."
The Economist, July 28, 2012
Which principle is The Economist relying on when using the Big Mac to value exchange rates?
A) interest rate parity
B) market price parity
C) purchasing power parity
D) exchange rate parity

Question

Quizplus · Accepted Answer

The Economist's Big Mac index is based on the principle of purchasing power parity (PPP), which suggests that in the long run, exchange rates should adjust so that an identical good or basket of goods costs the same in different countries when priced in a common currency.

"The Big Mac Index Is the Economist's Burger-Based Measure of Whether