The Big Mac index

The Economist’s Big Mac index gives a flavour of how far currency values are out of whack. It is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same everywhere. Our basket contains only one item, but it is found in around 120 countries: a Big Mac hamburger.

If the local cost of a Big Mac converted into dollars is above $5.28, the price in America, a currency is dear; if it is below the benchmark, it is cheap. The average cost of a Big Mac in the euro area is €3.95, or $4.84 at the current exchange rate. That implies the euro is undervalued by 8.4% against the dollar.

The New Zealand dollar looks a bit cheap.