Forex Blog: Currency Trading News & Analysis.

July 19th 2007

Big Mac Index Offers Currency Valuations via PPP

The Economist just released its an updated iteration
of its famous Big Mac Index, underscoring growing disparities in currency valuations. For those of you that aren’t familiar, the Big Mac Index uses the price of a McDonald’s Big Mac sandwich in different countries as a proxy for measuring purchasing power parity (ppp), that perennial staple of economics that theorizes a country’s currency and its inflation rate should move in opposite directions. Thus, where a Big Mac is observed to be more expensive than in the US, it would suggest that country’s currency is overvalued relative to the USD. Of course there are numerous other factors in the local price of a Big Mac, including raw materials and taxes, but the index still packs a pretty profound punch. Unsurprisingly, the most undervalued currencies can be found in Asia – notably the currencies of Japan, China, Thailand, Indonesia, etc. The most comparatively expensive Big Macs (and hence most overvalued currencies) can be found in Europe, especially in Scandinavia and Northern Europe.

Read More: The Big Mac Index

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