Burgernomics 101

The Economist recently published their annual Big Mac Index.

Invented in 1986 as a light-hearted guide to whether currencies are at their �correct� level, burgernomics is based on the theory of purchasing-power parity (PPP). This says that, in the long run, exchange rates should move toward rates that would equalise the prices of an identical basket of goods and services in any two countries. To put it simply: a dollar should buy the same everywhere.

Our basket is a McDonald’s Big Mac, produced locally to roughly the same recipe in 118 countries. The Big Mac PPP is the exchange rate that would leave burgers costing the same as in America. Comparing the PPP with the actual rate is one test of whether a currency is undervalued or overvalued.

A Big Mac in the U.S. averages $2.71. The cheapest? China at $1.20. Most expensive? Switzerland at $4.52.

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