1. Purchasing Power Parity
Purchasing Power Parity (PPP)is used to adjust for price and cost of living differences between countries when comparing GDP. It recalculates the value of a country's goods and services as if they were being sold at U.S. prices.
A MacDonald’s Big Mac Burger can be purchased almost anywhere in the world. This has made it a popular benchmark for measuring the purchasing power parity between nations.

2. Using Big Mac Index to Calculate China’s GDP with a PPP
Valuation:
For example, a McDonald's Big Mac costs $5.04. In China, you can get the same thing for only $2.79 ( calculated in U.S. $ using the market exchange rate). Therefore, the PPP would be
5.04/2.79 or For something that sells for $1 in China, it will sell for 1.8 times more in the U.S.
China’s nominal GDP is projected to be $ trillion. To better compare it to the U.S. GDP we multiply it by 1.8 to calculate how much these goods and services would sell for in the U.S. $ trillion X 1.8 = $ trillion. This is more than the U.S. GDP of $18 trillion, making China’s economy the largest in the world using a PPP valuation!

3. Using the Big mac Index to Calculate PPP Exchange Rate:
In China, the Big Mac would sell for for about 19 yuan. It sells for $5.04 in the U.S.
19 yuan/$5.04 = 3.76 yuan per $1 and is the Purchasing Power Parity (PPP)Exchange Rate. This tells us how much currency is required in China to purchase an identical product that can be purchased for a $1 in the U.S. This is different than the market exchange rate of 6.7 yuan per $1. The Purchasing Power Parity exchange rate adjusts for the fact that prices are much lower in China than in the U.S. and equalizes the purchasing power of the currencies in the 2 countries. This makes comparisons of GDP using a PPP valuation meaningful.

4. China’s GDP denominated in yuan can be adjusted to a PPP valuation by dividing it by the PPP exchange rate.
Comparing the PPP exchange rate to the market exchange rate allows us to see the yuan is undervalued by about 43%. Some of this is due to the fact that China conducts exchange market interventions to maintain an artificially low target value for their currency so the cost of their exports remain low and they can continue to export a lot.