The 2005 Big Mac Index

The Economist's authoritative 'Big Mac Index' has just been released, naturally prompting discussion about the relative strengths and weaknesses of currencies, and the notion of purchasing-power-parity (PPP) which underpins this 'index.' Oddly, no discussion is had on whether or not McD's new Deli Rolls will serve to undercut or supplant the Big Mac Index any time soon.

The cheapest Big Mac is in China and the most expensive in Switzerland. NZ falls in between, with our Big Mac price the closest of those measured to the US, and if these figures are to believed suggesting a 4% over-valuation. The Economist notes also that "the euro buys less burger than it should," "suggesting "perhaps inflexible wages, not a strong currency, are to blame."

The Big Mac index, which ['The Economist' has] compiled since 1986, is based on the notion that a currency's price should reflect its purchasing power. According to the late, great economist Rudiger Dornbusch, this idea can be traced back to the Salamanca school in 16th-century Spain. Since then, he wrote, the doctrine of purchasing-power parity (PPP) has been variously seen as a “truism, an empirical regularity or a grossly misleading simplification.”

The Salamanca school themselves can be considered proto-Austrians; the Mises blog discusses the Salamancan theory of purchasing-power parity and its modern incarnation here.