The golden-arches standard
p. 15 · Read in the full issue
Purchase Power Price (PPP) represents the exchange rate if it were based solely on Big Macs. For example, if a Big Mac costs £1.90 in Britain and costs $2.43 in US, then the PPP exchange rate would be 1.90/2.43 = 0.7819. If the actual exchange rate is lower (for example, 0.6349 for this case), then the Big Mac theory says that you should expect the value of the British Pound to go up until it reaches the PPP exchange rate.
The Over/Under valuation against the dollar is calculated as:
(PPP - Exchange Rate)
x 100
Exchange Rate
Sources; McDonald’s.The Economist, Pacific Islands Monthly
Big Mac prices
Under(-)/
Implied Actual $ over (+) in local in PPPof exchange
valuation against
currency dollars the dollar rate the dollar % United States $2.51 $2.51 - - - Australia A$2.59 1.54 1.03 1.68 -38 Britain £1.90 3.00 1.32 1.58 +20 Canada C$2.8 51.9 41.14 1.47 -23 Fiji F$2.9 51.41 1.17 2.11 -44 French PolynesiaCFP380 2.91 151 130 + 16 Japan ¥294 2.78 117 106 + 11 Malaysia M$4.52 1.19 1.80 3.08 -53 New Zealand NZ$3.40 1.69 1.35 2.01 -33 Samoa S$6.60 2.09 2.63 3.15 -16 Singapore S$3.20 1.88 1.27 1.70 -25