The Big Mac index

Currency comparisons, to go

Jul 28th 2011, 14:35 by The Economist online

A beefed-up version of the Big Mac index suggests that the Chinese yuan
is now close to its fair value against the dollar

THE Economist’s Big Mac index is a fun guide to whether currencies are at their “correct”
level. It 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.

PPP signals where exchange rates should move in the long run. To estimate the current fair
value of a currency we use the “line of best fit” between Big Mac prices and GDP per person.
The difference between the price predicted for each country, given its average income, and its
actual price offers a better guide to currency under- and overvaluation than the “raw” index.
The beefed-up index suggests that the Brazilian real is the most overvalued currency in the
world; the euro is also significantly overvalued. But the yuan now appears to be close to its
fair value against the dollar—something for American politicians to chew over. Read more in
our Economics focus and leader.

Click on the tabs in the table below for a ranking of currencies on both the raw and the
adjusted index:

• For more on the Big Mac index, see this week's leader and economics focus

The Big Mac index

Fast food for thought

What do hamburgers, lipstick and men’s

underwear have in common? The joys of
quirky economic indicators
Jul 30th 2011 | from the print edition

IT IS nearly 25 years since The Economist cooked up the Big Mac index. We devised it in
September 1986 as a fun way to explain “purchasing-power parity”, by comparing the prices
of hamburgers in different countries. But burgernomics has since provided serious food for
thought. Some economists think the Big Mac index has been surprisingly accurate in
predicting long-run movements in exchange rates. It has also provided a few hot tips (and
some half-baked ones) for investors.

When the euro was launched in 1999, almost everybody reckoned it would immediately rise
against the dollar. But the Big Mac index suggested that the euro was already overvalued.
Soros Fund Management, a prominent hedge fund, later told us that it sniffed at the sell smell
coming from the Big Mac index, but resisted the temptation to bite. It was cheesed off when
the euro promptly fell. Today, our burger barometer suggests that the euro is again
overvalued against the other main currencies, and it highlights the euro area’s internal
problems, showing that Greece, Italy, Portugal and Spain have lost competitiveness relative
to Germany.

Related topics

• Big Mac Index

Burgernomics is also a handy check on whether governments are understating inflation. It

supports claims that Argentina has been cooking the books: over the past decade, Big Mac
prices there have, on average, risen by well over ten percentage points more each year than
the official consumer-price index—a far bigger gap than in any other country.

But bingeing on burgernomics can be unhealthy. American politicians cite the Big Mac index
as proof that the yuan is massively undervalued. It is true that burgers are cheap in China, but
so they should be in all emerging economies, because wages are much lower. If the index is
adjusted for GDP per person, it shows that the yuan is now close to its fair value against the
dollar (see our Economics focus).

Alternative currency benchmarks have been proposed, based on the prices of iPods, IKEA
bookshelves, Starbucks lattes and even The Economist itself. None really cuts the mustard.
Studies suggest that the Big Mac index fairly closely tracks the purchasing-power-parity rates
calculated by more sophisticated methods. Yet whereas those fancier techniques require
researchers to gather thousands of prices in each country and take two years to produce, the
Big Mac index relies on a single product, so the results are almost instant.

See more country data and currency rankings in our

new improved Big Mac index

A general problem with official economic statistics is that they are published only after a lag
and are subject to big revisions. This explains the popularity of quirky but timely indicators
such as the crane index (the number of cranes you can see from a given point in a city), the
lipstick index (when things get tough women buy lipsticks instead of dresses) and our own R-
word index, which gives early warning of recessions by counting newspaper stories which
mention the R word.
When Alan Greenspan was chairman of the Federal Reserve, he monitored several unusual
measures. One favourite, supposedly, was sales of men’s underwear, which are usually pretty
constant, but drop in recessions when men replace them less often. The Old Lady of
Threadneedle Street is perhaps too prim to inspect men’s underpants. Instead, the Bank of
England tracks data on internet searches for telltale terms. It has, for example, found that the
trend in searches for “estate agents” can be a predictor of house prices.

It is time for another unorthodox measure. A more modern (or just lazier) outfit these days,
The Economist is giving “crowdsourcing” a try. What international indicator, edible or
otherwise, could usefully be served with Big MacCurrencies? Readers can send suggestions
to deliciousdata@economist.com. We will publish any especially tasty morsels.

from the print edition | Leaders