Sunday, November 16, 2008

The Big Mac Index

In September 1986, the Economist magazine in London launched the Big Mac Index as a way of comparing the purchasing power of the world's currencies. A Big Mac is a good indicator because it is one of the few products which is identical the world over.

In the United States in April 2002, USD2.49 would buy you a McDonald's Big Mac. In Switzerland, the same burger cost the equivalent of USD3.81; in Malaysia, it cost just USD1.33. In other words, you could purchase more for your dollar in Malaysia than in the USA, but considerably more than in Switzerland.

If a currency has a higher purchasing power in its own country than elsewhere (making a Big Mac cheap), it is said to be undervalued: you need to spend more of it to buy the same thing in other countries. If the currency buys less in its own country than elsewhere (making a Big Mac expensive), it is overvalued.

Source: Facts at Your Fingertips, Reader's Digest, 2002.

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