The Big Mac Index

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;

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

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?

Are they not saying the Euro is 50% overvalued ? So it should be worth 1 Dollar ? I'm confused.

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.

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.

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.

But but but, the index has Euro area at +50%

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 )

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.

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 )

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.

IOUs? So what makes those IOUs able to purchase more or less - sometimes of each other...

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.

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.

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?

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.


l

Quote :

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.