For many years now The Economist has estimated the under/over valuation of forex rates by calculating the implied purchasing power parity of a currency by converting the local price of a Big Mac in various countries back into US dollars. The assumption underlying this exercise is that the production costs and profit margins for the standard big-mac are uniform across the world. This exercise works best when comparing the exchange rates of countries with similar wage rates (developed to developed or developing to developing), since a country with lower wage rates will naturally have a lower production cost and selling price.
Interestingly, it appears the Euro may still be overvalued relative to the US dollar – despite what has proven to be a dismal year (data to July 22, 2010) for the EUR.
Source: The Economist