Sunday, August 1, 2010

Burgernomics says yuan needs to rise 48%?

The latest version of the Economist's Big Mac Index is out. The index, which is based on the premise that in the long run exchange rates should move to equalize the price of an identical basket of goods (n this case one Big Mac) between two countries, seeks to arrive at a light-hearted measure of how far currencies are from their fair value (in relation to dollar).

The index would suggest that a fair value dollar-yuan exchange rate should be 3.54 yuan to the dollar, compared with the current rate of 6.78, or the yuan is undervalued by 48%. In fact, its broader message would have it that emerging economy currencies are under-valued.

India is not covered under the index. But interestingly, even though the Big Mac is the cheapest in India (at around $1.22), it is amongst those where it is slowest earned (it takes almost 61 minutes of work to earn enough to buy a Big Mac Mumbai).

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