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.