Monday, April 18, 2005

The Big Mac Index

Another interesting comparison of international economies. This supports my contention that the Euro is overvalued. The Eurozone is facing serious problems, with a shrinking population, zero growth, and high unemployment. Their overly tight monetary policies make it even worse. All so that they can have bragging rights over having a stronger currency.

The Economist's Big Mac index is based on the theory of purchasing-power parity (PPP), the idea that exchange rates should move to equalise the prices of a basket of goods and services across different countries. Our basket is the Big Mac. For example, the cheapest burger in the chart is in China, at $1.26, compared with an average American price of $3. This implies that the yuan is 58% undervalued relative to its Big Mac dollar-PPP. On the same basis, the euro is 25% overvalued, the yen 17% undervalued.

Hat tip Johnny, UW MBA 2001, and international economist extraordinaire.

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