The Economist’s Big Mac Index uses the price of a Big Mac to compare exchange rates, and show how far currencies are from fair value. I do like charts that explain concepts in a simple way, as regular readers will know, and have tried to note each new Big Mac Index.
Here’s the LATEST INDEX, published on January 6th this year. Almost missed it, yet again. Click on the image to enlarge. This is what The Economist says about this chart:
“The most overvalued currency against the dollar is the Norwegian kroner, which is 96% above its PPP rate. In Oslo you can expect to pay around $7 for a Big Mac. At the other end of the scale is the Chinese yuan, which is undervalued by 49%. The euro comes in at 35% over its PPP rate, a little higher than half a year ago.”
Note: The Economist define PPP [Purchasing-power Parity] as the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country.