Implied PPP of the Dollar

Last Updated on Wednesday, 7 April 2010 12:48 Written by admin Wednesday, 7 April 2010 10:23

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.