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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. [As such, take a look at the chart below to see just how expensive a Big Mac is in your country (raw and adjusted for GDP per person) and therefore, by inference, the extent to which your country’s currency is over- or under-valued compared to the U.S. dollar.] Words: 421
So reports The Economist online (www.economist.com) in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
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The article goes on to say, in part:
Average prices, [naturally,] should be lower in poor countries than in rich ones because labour costs are lower… [so the] PPP signals where exchange rates should move in the long run [and, as such,] to estimate the current fair value of a currency, we [have developed a new improved recipe (see below) that] uses the “line of best fit” between Big Mac prices and GDP per person. The difference between the price predicted for each country, given its average income, and its actual price offers a better guide to currency under- and overvaluation than the “raw” index.
The beefed-up index suggests that the Brazilian real is the most overvalued [+149%] currency in the world [followed by Colombia (108%), Argentina (101%), Sweden (85%); Peru (63%), Switzerland (63%), Chile (58%), Hungary (57%), Turkey (53%) and Norway (46%)].
[For the record,] the euro is also significantly over-valued [on the basis of the Big Mac Index at 36%, while Canada’s currency is 24% over-valued, Australia’s by 12%, the U.K.’s (Britain) by 9% and Japan’s by 5%] but China’s yuan now appears to be close to its fair value against the dollar [over-valued by only 3% which is] something for American politicians to chew over. [See here for the complete list.]*http://www.economist.com/blogs/dailychart/2011/07/big-mac-index