The Big Mac index

Question P7.1.1

The Economist's Big Mac Index is a light-hearted measure of purchasing power parity between two currencies. Its premise is that the difference between the price of a McDonald's Big Mac hamburger in one currency (converted into US dollars (USD) at the prevailing exchange rate) and its price in the United States is a measure of the extent to which that currency is over- or under-valued (relative to the dollar).

The following data files provide the historical Big Mac prices and exchange rates for five currencies:

For each of the first four currencies, calculate the percentage over- or under-valuation of each currency as: $$ \frac{(\mathrm{local\;price\;converted\;to\;USD} - \mathrm{US\;price})}{(\mathrm{US\;price})} \times 100 $$ and plot it as a function of time.


Solution

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