When originally published, the Big Mac Index, produced by The Economist, was thought of as a whimsical application of the theory of purchasing power parity (used to explain movements in exchange rates in response to varying price levels in different countries). Over time, however, it became evident that very roughly, the index has had some minor predictive power, much to the amusement and amazement of many economists.
Here is the latest, along with the dicta:
Burgernomics:
The Economist’s latest
Big Mac index
The Economist
today publishes its latest Big Mac Index, a lighthearted guide to valuing
currencies. When demand is scarce and jobs are being lost, no one relishes a
strong currency. A country with an uncompetitive exchange rate will struggle to
sell its wares abroad and will also cede its home market to foreign firms. A
weak exchange rate, by contrast, encourages consumers to switch from pricey
imports to cheaper home-produced goods and services.
So which countries has the foreign-exchange market blessed
with a cheap currency, and which has it burdened with a dear one?
The dollar buys the most burger in Asia. A Big Mac costs
12.5 yuan in China, which is $1.83 at today’s exchange rate, around half its
price in America. Other Asian currencies, such as the Malaysian ringgit and
Thai bhat, look similarly undervalued. Businesses based in continental Europe
have most to be cheesed off about. The Swiss franc remains one of the world’s
dearest currencies. The euro is almost 30% overvalued on the burger gauge.
Denmark and Sweden look even less competitive.
However, The
Economist says: “The markets have been kindest to British
exporters. A year ago the pound was overvalued by more than a quarter on the
Big Mac gauge. Now it is close to its fair value against the dollar and looks
cheap against the euro. That shift has upset some other EU countries that had
relied on selling to spendthrift British consumers. But after years of
struggling with an overvalued currency, British firms will feel they deserve a
little mercy.”
About the Big Mac index
It is based on the theory of purchasing-power parity (PPP),
which says that exchange rates should equalize the price of a basket of goods
in each country. In place of a range of products The Economist uses just one item, a Big Mac
hamburger, which is sold worldwide. The exchange rate that leaves a Big Mac
costing the same in dollars everywhere is our fair-value benchmark.
Update: Because the above graphic is unclear, here is the table from their website:
