Friday, July 29, 2011

The latest Big Mac Index is out...See how much it costs around the world...

The latest Big Mac Index from The Economist is out.  At current (July 2011) exchange rates you can see how much in US dollars it takes to buy McDonald's signature sandwich in various countries around the world---look at the column to the right. The horizontal bars indicate in percentage terms how much that countries currency is overvalued or undervalued relative to Purchasing Power Parity (PPP).  PPP suggests that in the "long run" the ACTUAL published market exchange rate between two currencies (say, the Norwegian Krone at $1.00 = 5.41 Kroners--July 28th) should equal the ratio of the price of a Big Mac in Krones divided by the price of a Big Mac in Dollars (45 Kroners/$4.07 = 11.06). At PPP we would get 11.06 Kroners for each dollar exchanged, but at real world rates we are getting only 5.41 Kroners. We are paying a little over double the suggested PPP exchange rate, hence the blue bar (calculate percentage change--PPP exchange rate minus the Actual exchange rate divided by the Actual exchange rate times 100) and the implication that the Krone is OVERVALUED (+) relative to the dollar. 

The Big Mac is only one product sold in each of the countries and there are many factors that effect exchange rates. A fun exercise would be to find another closely related good and do a similar comparison.  Sounds like a homework project to me...

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