Big Mac

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In the history of the Big Mac index, the dollar has never been more overvalued

CURRENCY forecasters have had it hard in recent years. Most expected the euro to rise after its launch in 1999, yet it fell. When America went into recession last year, the dollar was tipped to decline; it rose. So to help forecasters really get their teeth into exchange rates, The Economist has updated its Big Mac index.
Click to enlargeDevised 16 years ago as a light-hearted guide to whether currencies are at their “correct” level, the index is based on the theory of purchasing-power parity (PPP). In the long run, countries' exchange rates should move towards rates that would equalise the prices of an identical basket of goods and services. Our basket is a McDonald's Big Mac, produced in 120 countries. The Big Mac PPP is the exchange rate that would leave hamburgers costing the same in America as elsewhere. Comparing these with actual rates signals if a currency is under- or overvalued.
The first column of the table shows the local-currency prices of a Big Mac. The second converts these into dollars. The average American price has fallen slightly over the past year, to $2.49. The cheapest Big Mac is in Argentina (78 cents), after its massive devaluation; the most expensive ($3.81) is in Switzerland. By this measure, the Argentine peso is the most undervalued currency and the Swiss franc the most overvalued.
Click to enlargeThe third column calculates Big Mac PPPs. Dividing the Japanese price by the American price, for instance, gives a dollar PPP of ¥105, against an actual exchange rate of ¥130. This implies that the yen is 19% undervalued. The euro is only 5% undervalued relative to its Big Mac PPP, far less than many economists claim. The euro area may have a single currency, but the price of a Big Mac varies widely, from euro2.15 in Greece to euro2.95 in France. However, that range has narrowed from a year ago. And prices vary j...