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Vol. 78, No. 1
Posted 1996-01-01

For Here or To Go? Purchasing Power Parity and the Big Mac

by Michael R. Pakko and Patricia S. Pollard

The theory of Purchasing Power Parity (PPP) has long held a prominent place in international economics. It states that price levels in different countries, as measured by a representative market basket of commodities, will be equalized by international trade. Empirically, however, PPP has not fared particularly well in formal statistical tests. The authors explain the underlying premise of PPP and examine some of the reasons why it might not hold in practice. As an illustrative example, they use a familiar market basket: two all-beef patties, special sauce, lettuce, cheese, pickles, onions, and a sesame seed bun.





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