by On 10 January 2019, the Economist came out with its latest Big Mac index. Also known as the burger benchmark, the index compares the price of a Big Mac around the world. © Kevkhiev Yury | Dreamstime.com The index uses the burger to compare the relative purchasing power of different currencies. Countries where Big Macs cost less than in the United States (in US$ terms) are deemed to have weak currencies, and those where they are more expensive are considered to have overvalued currencies. In Switzerland McDonald’s customers have to cough up CHF 6.50 (US.62) for the world’s most expensive Big Macs, which implies that the Swiss franc is overvalued by 20%. Last year it was 28% overvalued. So what happened? Two things. The value of the Swiss franc and US$ moved closer together, which narrowed
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On 10 January 2019, the Economist came out with its latest Big Mac index. Also known as the burger benchmark, the index compares the price of a Big Mac around the world.
© Kevkhiev Yury | Dreamstime.com
The index uses the burger to compare the relative purchasing power of different currencies. Countries where Big Macs cost less than in the United States (in US$ terms) are deemed to have weak currencies, and those where they are more expensive are considered to have overvalued currencies.
In Switzerland McDonald’s customers have to cough up CHF 6.50 (US$6.62) for the world’s most expensive Big Macs, which implies that the Swiss franc is overvalued by 20%. Last year it was 28% overvalued.
So what happened? Two things. The value of the Swiss franc and US$ moved closer together, which narrowed the US$ price gap by 2%. In addition, the US experienced Big Mac inflation of 6% – Big Mac prices went from US$ 5.28 to US$ 5.58, while Swiss prices held steady at CHF 6.50.
One way to reduce currency overvaluation is keep inflation relatively low.
Another three years of the same US and Swiss Big Mac annual price changes would almost eliminate the Swiss franc’s over valuation.
More on this:
The Big Mac index (The Economist website – in English)