What underlying concept does the Big Mac index relate to?

The Big Mac index is fundamentally connected to the concept of purchasing power parity (PPP). This index compares the prices of a Big Mac burger in various countries as a way to assess whether currencies are undervalued or overvalued relative to one another. The underlying idea of PPP is that in the absence of transportation costs and barriers to trade, the same goods should price similarly across different markets when expressed in a common currency.

By using a standardized product like the Big Mac—a globally recognized item—it provides an informal measure of a country's price level relative to others. If the price of a Big Mac is significantly lower in one country compared to another, it suggests that the local currency may be undervalued according to PPP principles. This makes the Big Mac index an accessible and visual tool for discussing currency valuation and broader economic assessments.

The choice relating to global inflation rates, trade balance, and market capitalization, while relevant to economic analysis, do not directly tie to the principle of purchasing power parity as effectively as the Big Mac index does.