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What is McDonald's Big Mac Saying About the US Dollar?

| July 21, 2015
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The purchasing power of the US Dollar has been increasing versus a wide range of global currencies over the last year. As you can see below, the US Dollar has dramatically appreciated against almost every major currency except for the Chinese Renminbi (which is closely pegged to the value of the US Dollar). Although, only time will tell if this is sustainable.

The Economist recently highlighted how this relates to an old "Big Mac Index". Below is a quick video describing the Big Mac Index

This is what the Big Mac index says today...you can also view the bigger interactive version here

According to the raw "Big Mac Index", there are now very few currencies that are not undervalued vs the US Dollar. However, as the Economist points out.....

  • Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index.
     
    This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today's equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation.

Below is a look at their "Adjusted Big Mac Index".....

 

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