Thursday, September 10, 2009

PPP explained by McD

I have no idea who it was, or when, but I mentioned the Big Mac Index and whoever the person was, they had no idea what I was talking about.

So here it is, the Big Mac Index explained:

Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued. Follow the link above to the Economist's site on the BMI...

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