"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 is relying on purchasing power parity, which states that exchange rates should adjust in order to make the price of a basket of goods the same in each country. The Big Mac is a commonly purchased item around the world and serves as an indicator of the relative prices of goods in different countries.

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