The Economist magazine in the year 1986, proposed a new index as an alternate measure for exchange rate. This new index studies the price of a Big Mac and compares them to calculate exchange rates. It was argued that McDonald was already established in many countries. Therefore, it can be used as a yardstick to compare the purchasing power of various countries. Hence, serves as a measure of purchasing power party. The main problem with this as that not everybody’s consumption basket includes Bug Macs. Rather, a fraction of the total population consumes it. Instead of representing a basket of diverse goods, it represents a basket consisting of a single commodity. As a result, Big Mac index will not reflect true cost of living.
