The Economist’s Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalise the price of a basket of goods and services around the world. Our basket is a burger: a McDonald’s Big Mac.
In Big Mac PPP terms, selected currencies were over or undervalued at the end of January. Broadly, the pattern is such as it was last spring.
The most overvalued currency is the Icelandic krona: the exchange rate that would equalise the price of an Icelandic Big Mac with an American one is 158 kronur to the dollar; the actual rate is 68.4, making the krona 131% too dear. The most undervalued currency is the Chinese yuan, at 56% below its PPP rate; several other Asian currencies also appear to be 40-50% undervalued.
It is one way to look at the economy I suppose. I respect the Economist but I am sure the Big Mac Index is only one part of the picture The Mac is relatively cheap in Japan however just to step foot in a taxi is US$7 and a movie is US$18! Not sure how McDs keeps the prices so low but I know they are determined to make the prices affordable here even if it means offering under valued meals.