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January 17, 2012

Latest Big Mac Index on Currency Undervaluation and overvaluation

THE ECONOMIST's Big Mac index is based on the theory of purchasing-power parity: in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries. This particular basket holds a McDonald's Big Mac, whose price around the world we compared with its American average of $4.20. According to burgernomics the Swiss franc is a meaty 62% overvalued.

In July 2011, the euro was 21% overvalued against the dollar, but it is now just 6% overvalued.

The Jan 2012 Economist Big Mac Index
China yuan is 42% undervalued. (China was 44% undervalued)
Hong kong is 49% undervalued.
Japan is 1% undervalued. (Japan was on par value 6 months ago)
Canadian dollar is 10% overvalued.
British pound is 9% undervalued.
Indian rupee is 61% undervalued.

Malaysia, Thailand, Taiwan, Russia, Indonesia, Saudi Arabia are all about 40% undervalued.
Brazil is 35% overvalued.

China gets a lot of pressure to revalue its currency but Russia does not. Russia is about one third the economy of China and has a higher per capita GDP. Russia and Saudi Arabia also has an economy which is mostly dependent on oil and gas resources.

Other petrocurrency (commodity economies) countries like Norway, Brazil and Canada have over valued currencies.




The implied PPP for the chinese yuan is 3.61 to the US dollar. Currently the exchange rate is 6.31 to the US dollar.

If China were to instantly revalue to the implied PPP value and other things were constant then the recent $7.8 trillion GDP (China and Hong Kong at the end of 2011) would be %75 more at $13.6 trillion GDP.

Current-dollar GDP -- the market value of the nation's output of goods and services -- increased 4.4 percent, or $163.3 billion, in the third quarter to a level of $15,176.1 billion. In the fourth quarter the US probably added $120 billion, so US GDP at the end of 2011 is about 15.3 trillion.

Eventually India will have its economy mature and have its currency trade closer to the implied value.

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