The Big Mac Index

Posted on 08. Nov, 2005 by in Saving & Investing

I was introduced to the “Big Mac Index” the other day and thought I would share this interesting table as a nice introduction to foreign exchange rates. The Big Mac Index, which is published semi-annually by The Economist, seeks to make exchange rate theory more “digestible.”
McDonald’s Big Mac
The Index is based upon the Purchasing Power Parity which states that one unit of U.S. currency will buy the same basket of goods and services anywhere in the world. In other words, the purchasing power parity implies tha the real exchange rate is always equal to one. However, this tends to be true only in the long run. Short-term fluctuations in the real exchange rate result in what you see in the Big Mac Index.

If the theory of the purchasing power parity holds, then the “Implied PPP of the dollar” from the Big Bam Index should by one dollar. However, the price of one dollar, in most cases, buys much more. This means that the U.S. dollar is currently being overvalued and therefore the country’s currency being compared to is undervalued.

But, whether you take a look at the Big Mac Index to help explain the mystery behind exchange rates or merely to see what a Big Mac in Poland really goes for these days – check it out! And for more information about the purchasing power parity check out wikipedia.

Big Mac Index, Economy, Purchasing Power Parity, Foreign Exchange Rate

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