The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level.
But the price of a Big Mac from McDonald’s is revealing more about the eurozone, the crisis, and the global currency wars than one could have ever expected.
In Ireland for example, the price of the mega burger dropped by approximately 45 cents over just 18 months – more than four times the drop in the price of the same burger in countries such as Greece, Spain, and Portugal.
Mr Wolff, who works with Brussels based economics think-tank Bruegel, comes to some interesting findings.
“The Big Mac tells us that Italy is the most expensive place in the euro area. A Big Mac costs €3.85, while it costs only €3.60 in France and €3.64 in Germany. Or to put it in percentages, in July 2011, Italy was overvalued by 2.9% while in January 2013, it was overvalued by 5.7% relative to Germany.”
“Austria and Germany grow above average, while, Greece, Ireland, Portugal and Spain are below average,” he said.
Or as the Economist puts it: “Currency wars: the burger’s verdict” so for example The Big Mac index suggests that currencies are particularly overvalued in Norway, Switzerland and Brazil (see chart).
On the other hand, the Indian rupee appears to be the most undervalued currency in the world.
The Big Mac Index takes the notion of Purchasing Power Parity (PPP) and compares the price of the world’s most popular burger, the Big Mac across countries relative to its price in the USA.
PPP refers to the idea that exchange rates across two countries should be equal to the relative price of a basket of goods and services in both countries.
Thus the price of a Big Mac, a good that is largely identical across countries, would be an effective barometer of what exchange rates between countries should look like.
A Big Mac anyone?
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