International exchange rates: Mac Attack, anyone?
Most currency relative value tools look at some mix of goods in each country (purchase power parity). The Economist cuts through the complexity by looking at just one ubiquitous product sold by a single organisation - the McDonalds Big Mac. Although the Big Mac index is really just a bit of fun, it has proved surprisingly effective over many years alerting people to significant disparities in currency fair values.
As with all international currency matters, the US dollar sets the base point. In effect, this implies that the US dollar price of a good is fair value. Clearly that’s not always so. The Europeans and, more recently, the Chinese have argued for an alternative, but there’s no sign of any real contender to be the new reserve currency. With that caveat, right now a Big Mac costs the Anglos and Japanese about the right price, the West Euros way too much, and most of the rest of the world way too little. Sounds fairly accurate to me!
