So the «raw» Big Mac index says that the yuan was undervalued by 45% at that time.īurgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. For example, the average price of a Big Mac in America in July 2017 was $5.30 in China it was only $2.92 at market exchange rates. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. As of April 2009, the Big Mac is trading in Germany at €2.99, which translates into US$3.96, which would imply that the euro is trading above the PPP, with the difference being 10.9%.THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. The Eurozone is mixed, as prices differ widely in the EU area. The pound was thus overvalued against the dollar by 28% This compares with an actual exchange rate of $2.00 to £1 at the time The implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56 The price of a Big Mac was £2.29 in the United Kingdom (varies by region) The price of a Big Mac was $3.57 in the United States (varies by store) This value is then compared with the actual exchange rate if it is lower, then the first currency is undervalued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is overvalued. The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). For these reasons, the index enables a comparison between many countries' currencies. The Big Mac was chosen because it is available to a common specification in many countries around the world as local McDonald's franchisees at least in theory have significant responsibility for negotiating input prices. In the Big Mac Index, the basket in question is a single Big Mac burger as sold by the McDonald's fast food restaurant chain. One suggested method of predicting exchange rate movements is that the rate between two currencies should naturally adjust so that a sample basket of goods and services should cost the same in both currencies.

Big mac index example