Burgernomics: the Big Mac index

image via The Economist

The smart money is betting against the Euro.

Yes, there’s trouble with Greece and interest rates are low and there’s too much debt. But there’s another reason to be pessimistic: have you seen the price of a Big Mac?

A Big Mac is a Big Mac wherever you go. Same sesame seed bun, same special sauce, same double beef patties. Comprised of the same tradeable goods and non-tradeable services worldwide it should, in theory, cost the same wherever you go.

The theory of burger-buying parity is tested in The Economist’s Big Mac Index. The index demonstrates the purchasing power of consumers around the globe by converting the world’s currencies to a hamburger standard. The fair-value benchmark– the point where there is purchasing parity between the nations– is the exchange rate that has every consumer world-wide paying the same price for a Big Mac (The Economist looks at that price in dollars). Paying more than the benchmark price for a Big Mac? You live in a country with an over-valued currency.

Travel across the European continent and the power of currency valuations comes to life.  A mere 9 Ukrainian hryvnias (the equivalent of less than $1.80) gets you a burger in Kiev. Hungry in Oslo and you’ll spend more than triple that amount in Norwegian kroners.

The Big Mac Index locates most of the world’s under-valued currencies in Latin American and Asian countries (Chines yuan buys you the world’s cheapest burger), while most of western Europe has over-valued currencies.

The Big Mac Index is undeniably simplistic. But it does make exchange rate theory a bit more digestible.

The complete index is found below:

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Big Mac Index

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