The Big Mac Index

#Money

Tue, Aug 2nd, 2011 12:00 by capnasty NEWS

The Economist has a rather unique way of comparing the purchasing power of money from country to country by using... Big Macs.

As they explain:

[The Big Mac index] is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of a basket of goods and services around the world. At market exchange rates, a burger is 44% cheaper in China than in America. In other words, the raw Big Mac index suggests that the yuan is 44% undervalued against the dollar. But we have long warned that cheap burgers in China do not prove that the yuan is massively undervalued. Average prices should be lower in poor countries than in rich ones because labour costs are lower. The chart above shows a strong positive relationship between the dollar price of a Big Mac and GDP per person.

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