Wednesday, January 28, 2009

Latest Big Mac Index

The latest edition of the Big Mac index, created by The Economist magazine, to compare the relative values of currencies with respect to the US dollar, by comparing the market prices (at market exchange rates) of Big Mac burgers in the respective currencies, is out. According to the index, if the price of a Big Mac translated into dollars is above $3.54, its cost in America, the currency is dear and if it is below that benchmark, it is cheap.

If the index is any indicator, the Yen and Pound are close to their fair values, while Chinese Yuan is under-valued by nearly 50% and Euro is over-valued by over 25%. The index survey does not include India, presumably since the Macs made their entry into India only recently. But now that there are 132 McDonalds restaurants in the country, it may be time for The Economist to include India. Till then, in a more crude manner, a Big Mac (if I am not wrong), costs Rs 85, which translates to $1.73 at an exchange rate of Rs 49 for a dollar, meaning that the rupee is under-valued by 51%!

1 comment:

VK said...

I don't understand why Economist continues with this pointless exercise.

It calls this a "lighthearted guide", which is rather misleading because there is no guidance to be derived from this index (Ruble is 45% undervalued against Dollar?) and it stopped being funny a long time ago. I am guessing that McD has a deal with the magazine to keep this going.

I am a big fan of your blog, so I request you to kindly label this post under Humour etc. rather than Forex Markets :)

Not that I expect someone to base their investment choices on this, but then, I didn't expect them to give AAA ratings to junk either.