What underlying concept does the Big Mac index relate to?

The Big Mac index is directly related to the concept of purchasing power parity (PPP). This index is based on the idea that in the long run, exchange rates should adjust so that identical goods cost the same in different countries when expressed in a common currency. The Big Mac, being a standardized product available in many countries, serves as a practical example to illustrate the relative cost of living and the over- or undervaluation of currencies.

By comparing the price of a Big Mac in various countries, one can assess whether currencies are traded at their true value based on the purchasing power of each currency. If a Big Mac is significantly more expensive in one country compared to another after adjusting for exchange rates, it suggests that the currency of the more expensive region may be overvalued relative to the other. This application makes the Big Mac index a relatable and accessible tool for understanding PPP in a global context.