From The Economist, "The Big Mac index (see chart above) is based on the idea of purchasing-power parity (PPP), which says currencies should trade at the rate that makes the price of goods the same in each country." Technically, the Big Mac Index is more of a test of the Law of One Price, an economic law that says "In an efficient market all identical goods must have only one price." Purchasing Power Parity generally applies to a basket of goods.
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