The Big Mac Index
The Economist has this thing called the Big Mac Index. It basically tells us the purchasing power of currencies around the globe.
Let’s let them explain:
THE Economist’s Big Mac index is a fun guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of a basket of goods and services around the world. At market exchange rates, a burger is 44% cheaper in China than in America. In other words, the raw Big Mac index suggests that the yuan is 44% undervalued against the dollar. But we have long warned that cheap burgers in China do not prove that the yuan is massively undervalued. Average prices should be lower in poor countries than in rich ones because labour costs are lower. The chart above shows a strong positive relationship between the dollar price of a Big Mac and GDP per person.
If you can stomach a pun-drenched article on the pros and cons of the Big Mac Index, and what lipstick and men’s underwear have to do with forecasting economic activity, point your browser here.