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The Big Mac Index

Posted By Barry Ritholtz On January 19, 2006 @ 6:00 pm In Currency,Retail | Comments Disabled

Cin135 [1] Here’s another table I don’t know what to make of:  The Economist’s Big Mac index [2]

Based on the theory of purchasing-power parity, under which exchange rates should adjust to equalise the cost of a basket of goods and services, wherever it is bought around the world.

In the present case, the "basket" is — literally — the Big Mac.

The cheapest burger in our chart is in China, where it costs $1.30, compared with an average American price of $3.15. The Economist claims this implies that the yuan is 59% undervalued.

If that’s the case, then any subsequent de-pegging of the Yuan to the Dollar could have devastating consequences for the greenback. 

I do not trade currencies, but I find this to be a real head scratcher. 


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[1] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/cin135.gif

[2] Economist’s Big Mac index: http://economist.com/markets/indicators/displaystory.cfm?story_id=5389856

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