The Big Mac Index

The Big Mac Index is an index of how much it costs, in local currency, for a McDonald’s Big Mac sandwich. The idea is that the purchasing power of a currency would be evident if viewed in relation to a common good purchased around the world. This is a measure of the purchasing power of the local currency. What it can tell us is how strong or weak a currency is relative to others.

For example, a Big Mac in the US costs about $4.79. In Switzerland it costs 6.74 francs. The implied purchasing power parity is $4.79/6.74 CHF = 0.71. The actual exchange rate is 0.96 CHF / USD.

(0.71-0.96)/ 0.96 = 26%

This makes the CHF 26% overvalued when looking at just the price of a McDonald’s Sandwich. This strong currency is something that has plagued large international Swiss exporters such as Nestle, Roche and Novartis. On the flip side, the benefits of being a safe haven currency have come with stability and trust. When speaking of fiat currencies, trust may be the most valuable trait.

While this is not the “end all, be all” of valuations for currencies, it is a useful tool as a quick-check to roughly see the state of currency strength around the globe.

 

 

Source: The Economist, Wikipedia

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