Currency valuation: Liquidity and the Big Mac Index6 min read . Updated: 17 Mar 2015, 01:26 AM IST
The problem with a Masala Dosa index, or a Big Mac Index, or even a Butter Chicken index, is that whatever food item we choose, it is likely to be much more liquid in its home market
One of the most popular trackers of relative values of currencies around the world is the Big Mac Index (mintne.ws/1GdLDM3). Introduced by The Economist magazine in 1986, this index is used as a barometer for different under- or overvalued currencies. The concept is rather simple—all over the world the Big Mac hamburger uses pretty much the same ingredients, and hence the cost of the Big Mac around the world should be pretty much the same (there is an adjustment factor in terms of per capita gross domestic product that accounts for differences in labour cost). Thus, comparing the dollar prices (at current exchange rates) of the Big Mac in different countries, we can estimate which currencies are under- or overvalued, and by how much.