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The Big Mac Index

This week's Economist has an updated "Big Mac Index". This attempts to use the price of a Big Mac to determine whether currencies are valued correctly. It also gives you an idea where you might not want to go on holiday with children (assuming they like going to McDonalds).

This summer we went on holiday to the country with the most expensive Big Mac in the world ($5.11), which is quite a shock when you live somewhere that has one of the cheapest ($1.55) and close to the very cheapest (China - $1.23). Next time we'll go to Thailand ($1.51) or Malaysia ($1.33), I think!

The prices in McDonalds tend to be indicative of prices generally, though obviously that is not always true. We all know that salaries in Hong Kong are much higher than in Thailand, or even Malaysia, yet that is not reflected in the Big Mac index. As it happens, UBS did some research on how long it would take an average worker to earn enough to buy a Big Mac and calculated that it would take a Thai worker 50 minutes, but an American only 12 minutes. Hong Kong comes in at 13 minutes, which sounds a little high to me. More details on this survey can be downloaded here.

As to which currencies are under-valued, well the Hong Kong Dollar and Chinese Reminbi both appear to fall into this category based on this data, whereas the Pound and the Euro appear to be over-valued. However, as far as I am aware the Big Mac index is not a good leading indicator of changes in exchange rates, and there is no reason to suppose that this is about to change!

So, in truth, the Big Mac index is just a bit of fun.


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