Saturday, July 9, 2016

Almost All Currencies Undervalued Versus the US Dollar Based on Big Mac Index

The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in January 2016 was $4.93; in China it was only $2.68 at market exchange rates. So the "raw" Big Mac index says that the yuan was undervalued by 46% at that time.

The latest data available (January 2016) shows that it is cheaper in local currency to buy a Big Mac in every other country than the United States except in Switzerland, Sweden and Norway.




4 comments:

  1. Replies
    1. *at market exchange rate

      So... no

      Delete
  2. Had to buy a BK Whopper in Stockholm a few months ago... Ouch

    ReplyDelete
  3. Of course this index does not account for differing costs. The cost of dealing with government regulations, the cost and need for liability insurance are a couple of examples of cost that are more difficult to nail down than the cost of labor or beef.

    The price of fast food (did not find specifically Big Mac) is not homogenized inside the USA let alone the world. According to expatistan.com the price of Combo meal in fast food restaurant (Big Mac Meal or similar) in San Francisco is $8 and $9 in NYC.

    https://www.expatistan.com/price/big-mac/san-francisco
    https://www.expatistan.com/price/big-mac/new-york-city

    ReplyDelete