GEOGRAPHICAL NAMES

The Economist uses the price of the ubiquitous McDonald's meal to calculate the "Big Mac Index", a guide showing how far from fair value different world currencies are. The Big Mac theory (a.k.a. purchasing-power parity, or PPP) says that exchange rates should even out the prices of Big Macs sold across the world.

See explanation in the Notes below the table.

Deviation of Currencies from their Fair Value
Shown on the Basis of July 22nd, 2010 Big Mac Prices

NOTE 1:

The Purchasing Power Parity (PPP) rate is the local Big Mac price divided by its price in the United States.

NOTE 2:

The Over/Under valuation against the dollar is calculated as follows using OANDA's currency exchange rates: 100 x (PPP - Exchange Rate) / Exchange Rate.

NOTES:

The implied PPP shown in the table is the exchange rate that would make a Big Mac cost the same abroad as it does in the USA. When you compare actual exchange rates with the implied PPP rate, you will see that most currencies are trading way above or below the US dollar, meaning that they are over- or undervalued. Keep in mind that PPP is a long-term indicator, pointing to where currencies ought to go in the future. (It's also best to use it only to measure currencies between countries that are at a similar stage of development.)

How to read this table

If a Big Mac costs €3.38 in countries that use the euro and $3.73 in the US, then the implied PPP rate is 3.38/3.73 = 0.91. If the actual exchange rate for the euro is lower that the implied PPP rate, the Big Mac theory suggests that the value of the euro might go up until it reaches the implied PPP rate. If the actual exchange rate is higher, then you might expect the euro to go down until it hits the implied PPP rate. The percentage of under- and over-valuation from the current exchange rate is shown in the table.