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 The Big Mac Index

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PostSubject: The Big Mac Index   Thu Jul 24, 2008 7:55 pm

Lo and behold! The Big Mac Index is here! It's been published by the Economist and it's available on their website. Here's the chart;

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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 7:58 pm

So they think the euro should be worth more like 2 dollars then?
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 8:00 pm

johnfás wrote:
So they think the euro should be worth more like 2 dollars then?
Is it that the Euro is seen as 30 cents too expensive? So a euro should equal $1.25/130 ?

Sorry it's % so 33% over that's ... 55 cents too expensive ? The Euro and Dollar should be at parity?


Last edited by Auditor #9 on Thu Jul 24, 2008 8:01 pm; edited 1 time in total
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 8:01 pm

Are they not saying the Euro is 50% overvalued ? So it should be worth 1 Dollar ? I'm confused.
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 8:01 pm

johnfás wrote:
So they think the euro should be worth more like 2 dollars then?

No, it's more like 1 euro should equal about 1.10-20 dollars.
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 8:02 pm

Ard-Taoiseach wrote:
johnfás wrote:
So they think the euro should be worth more like 2 dollars then?

No, it's more like 1 euro should equal about 1.10-20 dollars.

Ah ok, misreading. Good time to buy a load of dollars then according to big Ronald.
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 8:03 pm

johnfás wrote:
Ard-Taoiseach wrote:
johnfás wrote:
So they think the euro should be worth more like 2 dollars then?

No, it's more like 1 euro should equal about 1.10-20 dollars.

Ah ok, misreading. Good time to buy a load of dollars then according to McDonalds.

Yes indeed. The euro has been over-valued vis a vis the dollar for some time on the Big Mac index. It's the undervaluation of other currencies which keep it unnaturally high.
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 8:10 pm

But but but, the index has Euro area at +50% Razz
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 8:33 pm

What determines the currency value anyway? Is it the amount of trade on the world markets of that currency - goods sold in that currency? And how much speculation is in that currency value and if there is a speculation value in the value of the currencies then I don't know why that should really be allowed but that might be a different story (it's almost like being able to bet on whether or not your neighbour gets or loses a job Neutral )
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 9:03 pm

The Eastern currencies are certainly undervalued and currencies like the krone are at silly levels. I wouldn't consider the Swiss Franc more over valued than the Euro.

Japan is an interesting place in relation to interest rates and currency values.
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 9:39 pm

Auditor #9 wrote:
What determines the currency value anyway? Is it the amount of trade on the world markets of that currency - goods sold in that currency? And how much speculation is in that currency value and if there is a speculation value in the value of the currencies then I don't know why that should really be allowed but that might be a different story (it's almost like being able to bet on whether or not your neighbour gets or loses a job Neutral )

Dollar and Euro are fiat currencies, so they have NO value. Except that people's confidence in the currency will allow them to safely carry out transactions, without fear of the representative value plummeting. They are just IOUs.
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 10:01 pm

IOUs? So what makes those IOUs able to purchase more or less - sometimes of each other...
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PostSubject: Re: The Big Mac Index   Thu Jul 24, 2008 11:42 pm

Auditor #9 wrote:
IOUs? So what makes those IOUs able to purchase more or less - sometimes of each other...

A roundabout guarantee by the Government by virtue of the fact that the same government will accept them as payment for taxes. Dan will explain it better maybe.
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PostSubject: Re: The Big Mac Index   Fri Jul 25, 2008 1:42 am

EvotingMachine0197 wrote:
Auditor #9 wrote:
IOUs? So what makes those IOUs able to purchase more or less - sometimes of each other...

A roundabout guarantee by the Government by virtue of the fact that the same government will accept them as payment for taxes. Dan will explain it better maybe.

It's also interest rates. If there is a high interest rate environment in one country, its currency will be supported since people will place their money there to garner the large payments on their deposits. This is why currencies tend to rise when the Central Bank raises interest rates. It makes government bonds, gilts and financial instruments in general more attractive in that jurisdiction. It also stops capital outflows from natives since there's less of a draw to put your money elsewhere in the world. That strengthens the currency since there is a demand for it.
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PostSubject: Re: The Big Mac Index   Fri Jul 25, 2008 1:47 am

I notice you're not saying anything about a currency having value, like EVM said it didn't. So what does it have - a demand? Is the price of the currency to do with the amount of it kept in the country's banks and the amount kept abroad and how exact is currency science anyway?
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PostSubject: Re: The Big Mac Index   Fri Jul 25, 2008 1:58 am

Auditor #9 wrote:
I notice you're not saying anything about a currency having value,

A euro note is only truly as valuable as the fibres that went into making it. It is only our ability to trust that it represents 5-500 euro-worth of value which keeps the whole system working. If we switched back to the gold standard, about 90% of the notes in circulation would have to be withdrawn as there wouldn't be the gold to support them.


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ike EVM said it didn't. So what does it have - a demand? Is the price of the currency to do with the amount of it kept in the country's banks and the amount kept abroad and how exact is currency science anyway?

Yep, something like that. If lots of people want dollars(ie, to pay for oil, to keep a currency peg, to advance geopolitical interest etc.) and not a lot want to sell them, then the dollar will appreciate in value. Personal deposits, tourist exchanges, trades by foreign exchange dealers and business transactions involving different currencies all cause variations in the supply and demand of a currency and they cause fluctuations in the value of a currency.

Currency science is as accurate as can be expected since it can be sometimes chaotic and is made by us imperfect beings.
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