Huffpost UK uk

Burgernomics: Big Mac Index Points To An Undervalued Indian Rupee

Posted: Updated:

Big Macs are four times more expensive in Switzerland than in India, a study has reported.

That revelation comes thanks to The Economist's latest Big Mac Index survey, which compares the price of the 540-calorie burger around the world.

It might sound like a useful way for McDonald's fans to get a good deal on beef 'n' cheese, but it's actually used as a "fun" - albeit heavily criticised - method of comparing the value of currencies to their relative purchasing power.

The Index is based on the theory that in the long run exchange rates should adjust to equal the price of specific goods in different countries - in this case a Big Mac.

Known as "burgernomics", the index was devised in a widely-cited paper by Pam Woodall and has been running since 1986.

The Big Mac exchange rate is worked out by dividing the price of a burger between its price in one country and another, and comparing that rate to the exchange rate of the currency. If the value is lower then the currency is under-valued - and vice-versa.

According to this year's study, the most undervalued currency in the world is the Indian rupee. Comparing the price of a US Big Mac with an Indian Maharaja Mac (made with chicken, since normal Big Macs are not sold in the mainly Hindu country) researchers found that the rupee is 60% undervalued.

Compared to an American average of $4.20 the India equivalent cost just $1.62.

The currency that purchases the most Big Macs proper for the dollar is the Ukrainian Hryvnia, which is 50.2% undervalued according to the index. A Big Mac in Ukraine is $2.11 - one cent cheaper than in Hong Kong, which was the runner-up.

The most overvalued currency according to the study is the Swiss france, which is by the Big Mac measure overvalued by 62%. A burger in Switzerland costs $6.81.

The euro has fallen in value compared to the dollar since the survey was last run in July 2011, and is now only 6% overvalued compared to 21% last time.

"Other European currencies have also weakened against the dollar since our previous index," The Economist said. "Notably the Hungarian forint and Czech koruna, which have fallen by 23% and 16% respectively. Six months ago both currencies were close to fair value, but they are now undervalued by 37% and 18%."

However the Big Mac Index has been seriously criticised by som economists, who argue that the cost of a burger has to be adjusted for the relative purchasing power of local workers.

When an adjusted version of the chart was made taking into account local labour costs it found vastly different results.

In 2006 UBS Wealth Management compared the Big Mac Index to average earnings, claiming it produced a more accurate picture of purchasing power.

Around the Web

Big Mac Index - Wikipedia, the free encyclopedia

Big Mac Index | OANDA

Indian currency most undervalued: Big Mac Index

Big Mac index tracks currencies worldwide

Next hurdle for rupee is around 50

The Swiss Franc is the most overvalued currency in the world, and the Indian ...

Presented By Chivas Regal Scotch Whisky