![]() ![]() Norway had the most expensive big mac because its local currency, the kroner, was over-valued by 72%.Īnd China had the least expensive big mac because its local currency, the yuan, was under-valued by 49%. If we divide the local price in dollar by the US price and subtract 1 from the quotient, we have a rough idea of how much the local currencies are over or under valued from the purchasing power parity. So China had the least expensive big mac in the world. Japan sold its big mac for $3.46, South Korea for $2.59, Mexico for $2.39. Which country had the least expensive big mac? So Norway had the most expensive big mac in the world. In 2009, the big mac sold for $3.57 in the US. Let’s go shopping in selecting countries to find the most expensive and the least expensive big mac by comparing their prices in dollar. We can get the same 72% over-valuation percentage by subtracting one from the dividend. ![]() The transformed formula says that we can first convert the kroner price into dollar price using the actual exchange rate (e), and divide the dollar price in Norway by the dollar price in the US. This same formula for computing over or under valuation of foreign currencies can be transformed to compare the prices in US dollar by dividing the numerator and the denominator by the actual exchange rate (e). This comparison shows that the kroner was over-valued by 72%. Then divide the difference by the actual exchange rate (e). So, the kroner actually was more expensive than the implied purchasing power parity (PPP).īy comparing these 2 exchange rates, we can get a rough idea how much the kroner was over-valued.įirst, subtract the actual exchange rate (e) from the purchasing power parity (PPP). ![]() We call the implied exchange rate the purchasing power parity (PPP) because this rate would have equalized the price of the big mac in both countries.īut the actual exchange rate was only 6.51 kroner per dollar. In other words, the implied exchange rate should be (40 kroner/$3.57 = ) 11.2 kroner per dollar. If $3.57 could buy 40 kroner in the foreign exchange market, the big mac in Norway would have cost the American buyer the same in both countries. The big mac sold for 40 kroner in Norway and $3.57 in the US in 2009. The big mac index provides an interesting perspective into the determination of foreign exchange rates. ![]()
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