It is that time of the year again, and Britainâ??s Economist magazine has just published its annual â??Big Mac Index.â?
Since 1986, the â??Big Mac Indexâ? has provided a tongue-in-cheek but surprisingly useful way of measuring purchasing power parity (PPP) — that is, the relative over and undervaluation of the worldâ??s currencies compared to the U.S. dollar.
According to the theory of purchasing power parity, a dollar should buy the same amount of the same good across all countries.
The â??Big Macâ? Index compares the cost of Big Macs — an identical item sold in about 120 countries — and calculates the exchange rate (the Big Mac PPP) that would result in hamburgers costing the same in the United States as they do abroad.
Compare the Big Mac PPP to the market exchange rates, and you instantly see which currencies are under or overvalued.
Read more about how the Big Mac Index points to which currencies are the best investment at Eagle Daily Investor.