Wednesday, February 06, 2013

Big Mac Index

The Economist publishes their version on Purchasing Power Parity here.

The index is interesting because the Big Mac is sold in over 129 countries.  Usually, there is criticism of the index after it is published so the Economist offers this solution to it's data acquisition:

his adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today's equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation.

I think a better measure would be digital downloads since digital downloads have factor mobility and are homogeneous.

Every Tuesday, I thank my luck stars that I can afford this magazine.  

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