Big Mac Index: Europe overvalued, Asia undervalued


The Economist released its remarkably telling Big Mac Index this past weekend.  The index looks at the relative cost of Big Mac in various countries to gauge how over- or undervalued the currencies in those locales are.  Judging from this Index, there are some monster distortions in the currency markets right now.

Big Mac Index July 2009

The numbers marked in red are the areas I would like to highlight. They are representative of massive currency overvaluation in Europe (+72% in Norway, +55% in Denmark, +29% in the Eurozone) and absurd levels of undervaluation in Asia (-49% in China, –52% in Hong Kong, –47% in Malaysia and –42% in the Philippines).  One might argue the European overvaluation represents a repudiation of the U.S. dollar.  Sterling is only +3% versus the Dollar in the index, so that suggests a repudiation of the Pound as well.

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On the other hand, Asian currencies are generally not floating but rather fixed via dirty float to the U.S. dollar. For example, the Malaysian ringgit and the Chinese renminbi are two currencies with a managed float. So, the undervaluation of Asian currencies is a political decision of mercantilist economic policy in the region. This has been a major cause of the fabled Asian savings glut and large current account surpluses in Asia.  In my view, this as also been a major source of instability in the global financial system. 

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Clearly, Bretton Woods II has outlived its usefulness.


The Big Mac index: Cheesed off – The Economist

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