Tuesday, September 1, 2009

Big Macs Again


The Economist states upfront (with tongue firmly in cheek) that the Big Mac Index is "a lighthearted guide to valuing currencies" and "It is arguably the world's most accurate financial indicator to be based on a fast-food item."

The joke here is that it's the only financial indicator based on a fast food item.

The Star however apparently takes this seriously:

"According to the latest Big Mac Index, arguably the world’s most accurate financial indicator to be based on a popular burger, most Asian currencies are undervalued against the US dollar.

The ringgit is undervalued by 47% against the greenback, which was at the same level as the Thai baht.

Only Hong Kong (52%) and China (49%) were lower than Malaysia and Thailand among Asian countries."

I've ruminated on this subject before, and I'm not inclined to go through it again - but PPP-based exchange rate measures are simply not an empirically valid way to evaluate exchange rate levels or movements.

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