Last week, The Economist released its Big Mac
Index (via Catherine Rampell of The New York Times
Economix) which basically compares how much it costs to buy – you
guessed it – a Big Mac in countries across the world. The magazine
explains the index as a:
…lighthearted attempt to gauge how far currencies are from their fair value. It is based on the theory of purchasing-power parity (PPP), which argues that in the long run exchange rates should move to equalise the price of an identical basket of goods between two countries. Our basket consists of a single item, a Big Mac hamburger, produced in nearly 120 countries. The fair-value benchmark is the exchange rate that leaves burgers costing the same in America as elsewhere.
And it goes on to note a number of caveats about it:
The Big Mac numbers should be taken with a generous pinch of salt. They are not a precise predictor of currency movements. The bulk of a burger’s cost depends on local inputs such as rent and wages, which tend to be lower in poor countries. Consequently PPP comparisons are more reliable between countries with similar levels of income.
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Author: Richard Florida
