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Big Mac Index

clipped from
The Big Mac Index

OUR Big Mac Index provides a rough guide to how far currencies are from fair value. The index is based on the theory of purchasing-power parity (PPP), which says that exchange rates should equalise the price of a basket of goods—in this case, a Big Mac hamburger. The implied PPP is the exchange rate that makes the dollar price the same in each country. Using this yardstick, China's yuan is the cheapest currency. A Big Mac in China costs 11 yuan, or $1.45, an undervaluation of 58%. However, local inputs such as low rents and wages tend to be lower in poorer countries and less easily arbitraged across borders, so PPP is a better guide to misalignments between countries at a similar stage of development. Most rich-world currencies are overvalued against the dollar, including the euro (by 22%) and the Swiss franc (by 53%). The yen is an exception, but although it is undervalued by 33% in Big Mac terms, broader PPP measures would suggest that it is close to fair value.