What the Big Mac index tells you about currency wars
Despite a recent bout of weakness, the dollar still looks strong. Consider the Big Mac index, our lighthearted measure of currency valuation. Of the currencies of the 20 trading partners studied by America’s Treasury, our measure suggests that all have gained relative to the greenback since July, but that all apart from the Swiss franc are still cheap. That gives the incoming Biden administration, which has promised to take “aggressive trade-enforcement actions” against currency manipulators, lots to chew on.
Our burger-based index is premised on the idea that prices should adjust over the long run, so that the same basket of tradable goods costs the same everywhere. Converting prices into dollars at prevailing exchange rates lets you judge whether a currency is too cheap or too dear. To avoid the problem that people buy different things in different places, we compare the price of just one good: the McDonald’s Big Mac. The burgers are not exactly the same across countries—India’s Maharaja Mac, for instance, does not contain beef—but they are consistent enough. A burger in Thailand costs 25% less than in America when its price is converted to dollars at prevailing exchange rates, for example, suggesting that the Thai baht is undervalued.
