<title>The Big Mac index

The Big Mac Index is an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries. As stated in the Economist, it "seeks to make exchange-rate theory a bit more digestible".

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.

The table below shows by how much, 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 previous time this table was compiled (see article). 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.

The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements—such as rent and labour. For that reason, it is probably least rough when comparing countries at roughly the same stage of development. Perhaps the most telling numbers in this table are therefore those for the Japanese yen, which is 28% undervalued against the dollar, and the euro, which is 19% overvalued. Hence European finance ministers’ beef with the low level of the yen.

For example, suppose the price of a Big Mac is $2.50 in the United States and £2.00 in the United Kingdom; thus, the PPP rate is 2.50/2.00 = 1.25. If, in fact, the US dollar buys £0.50 (or £1 = $2.01), then it is under-valued (1.25 < style="font-weight: bold;">Deductions
6:44 PM 2/20/2007

Measuring Income between countries

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.

1000 South Korean won = 1.64 SGD
1 Malaysian ringgits = 0.44 SGD
1 Australian Dollars = 1.19 SGD

Big Mac Singapore Sin$3.60
Big mac South Korea Sin$4.75
Big Mac Malaysia Sin$2.41
Big mac Australia Sin$4.092843

Malaysia to Singapore Ratio

2.41
/ 3.6
= 0.669444444444444
* 100
= 66.9444444444444

67%

Therfore income of e.g. Sin$3000 should in purchasing power parity for a person be getting in Malaysia an income of
4 579.89954 Malaysian ringgits (Sin$2010)

South Korea to Singapore Ratio
------
4.75
/ 3.6
= 1.31944444444444
* 100
= 131.944444444444

132%

Therefore income of e.g. Sin$3000 should in PPP for a person be getting in South Korea an income of 2.41836676 million South Korean won(3 960 Singapore dollars)

Australia to Singapore
------
4.09
/ 3.6
= 1.13611111111111
* 100
= 113.611111111111

114%

Therefore income of e.g. Sin#3000 should inPPP for a person be getting Australia an income of 2 842.4835 Australian dollars(3 420 Singapore dollars)