Big Mac Index (PPP FX rates)

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

via Fancy a Big Mac? PPP FX rates based on The Economist’s Big Mac Index » Plan B Economics.

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