Last Updated on Sunday, 21 February 2010 12:25 Written by admin Sunday, 21 February 2010 12:25

For those of you interested in using the Big Mac Index for profit by either buying ETFs that track undervalued currencies or trading in foreign exchange directly, don’t forget about the differences between the short and long run. While PPP will eventually work, it may take years for undervalued currencies to gain value and for overvalued currencies to lost value. Government policies can serve to keep a currency undervalued for decades. That said, trading currency based on the Big Mac Index may be directionally right (under or overvalued), you may not be around long enough to actually see any of the gains.

On the flip side of the coin, if the Big Mac Index verifies other data that is indicating an over or undervaluation of currency, that would probably be a better situation to be involved in. Use it as “a” factor and not “the” factor.

Last Updated on Friday, 19 February 2010 03:52 Written by admin Friday, 19 February 2010 03:49

This video was produced as part of the education project, Mathematics for Economics: enhancing Teaching & Learning. See more at: http://www.metalproject.co.uk

Last Updated on Saturday, 13 February 2010 08:29 Written by admin Friday, 12 February 2010 04:35

This excerpt is from The Economist and describes the long term tendency of currency values to converge. In other words, move toward a situation where a dollar has the same purchasing power no matter what country you’re in.

Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.