The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued.
For example, using figures in July 2008:
* the price of a Big Mac was $3.57 in the United States
* the price of a Big Mac was £2.29 in the United Kingdom (Britain) (Varies by region)
* the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56
* this compares with an actual exchange rate of $2.00 to £1 at the time
* [(1.56-2.00)/2.00]*100= -22%
* the pound was thus overvalued against the dollar by 22%