Published April 28, 2017
If you didn’t sleep through Econ 101, you probably remember the Big Mac Index — The Economist magazine’s charmingly simple way to predict whether a currency is overvalued or undervalued (in terms of purchasing power) with respect to the dollar. An example: if the average price of that most famous of burgers is $5.06 in the United States, but just $3.04 in Hungary at the current dollar-forint exchange rate, the Big Mac Index implies that the forint is 40 percent undervalued with respect to the dollar. What’s especially cool is the fact that the back-of-the-envelope Big Mac Index doesn’t do a bad job as a stand-in for the highly technical index the World Bank uses to adjust estimates of GDP in local currencies to “purchasing power parity” estimates in U.S. dollars.
Here is a sampling of countries showing the latest Big Mac Index, along with the comparable World Bank conversion factor for 2015 and the Big Mac Index for the middle of that same year (2015). No matter how you slice it, it seems the dollar is overvalued. Or to put it another way, for those of us paid in dollars, the rest of the world is a pretty cheap place to buy Big Macs (and a whole lot else).