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What does the Big Mac Index say about the Pound? As the euro is used in 23 different countries, including major economies like Germany and France, this suggests that millions and millions of people are losing out as a result of inaccurate exchange rates. This is yet another example of a world-leading currency that the Big Mac Index believes to be undervalued against the dollar. If we take the Big Mac Index as accurate, the euro is being undervalued by a significant 16.8 percent. They place the Euro at only 0.87 to the dollar. Exchange rates - of course - argue differently. That implies that the euro should be valued at 0.73 to the dollar. If you want a Big Mac in the Euro area it’s going to set you back €4.05. That’s actually shown to be overvalued by 18.7 percent against the dollar. One notable exception is the Swiss Franc. This implies that the Chinese yuan is undervalued by 45.3 percent.
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The official exchange rate, however, values the yuan at 6.85 to the dollar. A Big Mac costs 20.90 yuan in China, which would suggest an exchange rate of 3.75 yuan to the dollar.
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The Index also reveals that major economies like China have been left short changed by official exchange rates. That’s despite the exchange rate being 37.45 pesos to the dollar. A Big Mac costs 75 pesos in Argentina and $5.58 in the United States. According to the Big Mac Index, the Peso was undervalued by 64.1 percent. The Argentinian Peso is an example of a currency that has apparently been damaged by exchange rate valuations. It concluded that nearly every global currency - except the Swiss Franc, Norwegian Krone and Swedish Krona - was undervalued against the dollar.
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The Big Mac Index was most recently updated in January 2019. If the value generated is lower than the actual exchange rate between the two countries, it means that the first currency is under-valued - and over-valued if this value is higher. The price of a Big Mac in one country (in its own currency) is divided by the price of a Big Mac in another country (in its currency). The Big Mac Index calculates PPP with a unique equation. That’s the idea that the Big Mac can be used as a great tool to recognise currency misalignment and identify a currency’s actual buying-power. The Big Mac Index was the influence behind the concept of ‘Burgernomics’. Since then, it has become a great tool to recognise currency misalignment. The Big Mac Index was invented by The Economist as a way of making exchange-rate theory more understandable. The Big Mac was chosen as a good commodity to measure PPP back when the Index was founded in 1986 because it holds a consistent value over time. This means that, according to the Big Mac Index, the rouble is undervalued by 70.4 percent. However, the official exchange rate between the dollar and the rouble is 66.69 to $1. That’s significantly less than the $5.58 that customers have to cough up for a Big Mac in the US. Putting the jargon aside, that means that it’s an index that measures how much a Big Mac costs in countries with different currencies.įor example, the Big Mac Index reported in January 2019 that a Big Mac in Russia costs $1.65 (110.17 Roubles). It’s a way for economists to measure the Purchasing Power Parity (PPP) of different currencies. The humorously named Big Mac Index is actually a pretty big deal.