"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 principal is The Economist relying on when using the Big Mac to value exchange rates?

Question

Quizplus · Accepted Answer

The Economist is relying on the principle of purchasing power parity (PPP) when using the Big Mac to value exchange rates. PPP states that exchange rates should adjust so that the prices of a basket of goods and services are the same in different countries. The Big Mac is used as a representative item in the basket of goods, as it is a standardized product sold in many countries around the world, and the prices can be easily compared.

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