Big mac index example10/31/2023 ![]() In other words, the implied exchange rate should be (40 kroner/$3.57 = ) 11.2 kroner per dollar. If $3.57 could buy 40 kroner in the foreign exchange market, the big mac in Norway would have cost the American buyer the same in both countries. The big mac sold for 40 kroner in Norway and $3.57 in the US in 2009. Most currencies are undervalued against the dollar and the Big Mac is "cheaper" (in US dollars) in the rest of the countries on the list.The big mac index provides an interesting perspective into the determination of foreign exchange rates. ![]() As the result indicates, as of January 2016 only Switzerland, Sweden and Norway have a "more expensive" Big Mac than in the United States. If in the conversion of the local currency to dollars its price is below this level, then the currency is undervalued. Or what is the same, the The exchange rate should be 1 euro = 1.2325 dollars (which is equal to 1 dollar = 0.8113 euros). ![]() ![]() In other words, the European currency should appreciate 18.9% (or the dollar depreciate 23.3%) to adjust to the real exchange rate, measured by the purchasing power of a Big Mac. I mean, the Big Mac is cheaper in Europe.Īs the dollar price of the Big Mac in Europe is lower than the price of the Big Mac in the United States, we say that the euro is undervalued against the dollar (or the dollar is overvalued against the euro). ![]() Converting the Big Mac in euros to dollars at the official exchange rate of the moment (1 euro = 1,075 dollars) it turns out that a Big Mac in Europe is worth 4 dollars. If we take as a reference the Big Mac index of 2016, in which the cost of the Big Mac in the United States is $ 4.93 and in the eurozone its cost is 3.72 euros. In the example of the hamburger, this theory can be applied and considered that the market is efficient, because otherwise it would be possible to arbitrate and buy hamburgers in one country and sell them in another obtaining a risk-free margin. We assume that the market is efficient, and the relationship between currencies should be similar to the relationship between the prices of goods in that country. Apart from other indicators that more accurately reflect purchasing power parity, it can be suitable as a measure to check whether or not a currency is overvalued, forgetting about short-term factors that may affect the behavior of currencies (such as an election or an attack). ![]()
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