An update on how a digestible burger index reveals how currencies across the globe is faring, with Stephen Gallo, Schneider Foreign Exchange head of market analysis.

A relatively fixed set of consumer products and services valued and used on an annual basis to track inflation in a specific market or country. The goods in the basket are often adjusted periodically to account for changes in consumer habits The basket of goods is used primarily to calculate the Consumer Price Index (CPI).

Purchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries. The idea originated with the School of Salamanca in the 16th century [1] and was developed in its modern form by Gustav Cassel in 1918.[2] The concept is founded on the law of one price; the idea that in absence of transaction costs, identical goods will have the same price in different markets.

Argentinian Peso and the Big Mac Index

Argentinian Peso ETFs

Current Value of the Argentinian Peso

Big Mac Index and the Brazilian Real

Current Value of the Brazilian Real

Brazilian Real ETFs

Implied PPP of the Dollar = Big Mac Price in Local Currency / Big Mac Price in Dollars

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You can think of implied PPP like this. If a Big Mac costs 11.5 Pesos in Argentina and the same Big Mac costs $3.57 in the United States, then according to Purchasing Power Parity (and using the Big Mac as a typical basket of goods) 11.5 Pesos should equal $3.57. If 11.5 Argentinian Pesos did in fact equal $3.57 then the exchange rate would be 11.5 / 3.57 = 3.22 Pesos per dollar. So in this case, the Implied PPP of the Dollar is 3.22 Argentinian Pesos.

Likewise, in Brazil a Big Mac costs 8.03 Brazilian Reals and again in the United States it costs $3.57, then the Implied PPP of the Dollar would be 8.03 / 3.57 = 2.25 Reals per Dollar. Since you can actually buy 2 Reals per dollar (according to this Big Mac Index report) this implies that the currency is overvalued by 13%. Click here for more information of the relative over or undervaluation of currencies as used in the Big Mac Index.

Please post any questions you have as a comment to this post. Thanks.

Currency ETF spreadsheet coming soon …