Currency prediction and the Big Mac Index
Last week, The Economist published its latest Big Mac Index. Briefly, it compares the prices of the ubiquitous McDonalds menu item in a broad cross-section of economies, and adjusts those prices for relative purchasing power (a standard economic normalisation). The adjusted prices are then compared to the US price for a Big Mac. The percentage difference indicates how much the currency is under- or over-valued.
As at 30 January 2009, the EBMI calculated that, relative to the US dollar:
- The Pound is 7% undervalued
- The Yen is 9% undervalued
- The Kiwi is 30% undervalued
- The Ozzie is 38% undervalued
- The Yuan is 48% undervalued
And:
- The Loonie is 5% overvalued
- The Euro is 24% overvalued
- The Norwegian Kroner is 63% overvalued.
I often teased my fellow directors at Deltec with the Big Mac Index; 95% of our revenues were international. However, the EBMI has proven over the years to work as a rough and ready indicator of a currency’s long-run relative value. Use this information at your peril.
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August 25th, 2009 at 3:46 pm
[…] Economist’s Big Mac Index is somewhat accepted as a rough and ready medium-term indicator of underlying currency value. Now […]