Posts tagged: Purchasing Power Parity

The Big Mac Index and The Purchasing-Power Parity

Big Mac index was invented by The Economist in 1986 as a lighthearted 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 an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in July 2016 was $5.04; in China it was only $2.79 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 45% at that time.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index. Below there are the data as of July 2016.

 

Raw index

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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A clip from a talk: the Forex Market

What is Forex? It’s an interbank market for currency exchange. “Interbank” is the key word here. In Russia, this term is usually referred to speculative trading by brokerage firms. Read more »

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