In early 2001 a Big Mac cost $US1.52 at market exchange rates, undervaluing the Aussie at 40.3 per cent. In an ideal world, exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in The Economist’s case, a burger) in any two countries.īefore 2009 the Aussie had been heavily undervalued, according to the Big Mac Index. It is based on the theory of purchasing-power parity – a technique used to the measure the relative vale of different currencies. The Economist newspaper invented the Big Mac Index in 1986 in an effort to make exchange rate theory more digestible. Using 'The Big Mac Index' complex economic concepts are easily understood, even by a dolt like me. OK, you may not understand all there is to know about Exchange Rate Theory and Purchasing Power Parity but you now understand something about it. The consumer price index rose by 0.5 per cent for the second quarter of this year to take the annual headline rate to 3 per cent, which is at the top end of the RBA’s target band. It turns out that a Big Mac in Norway costs 7.73, 3.57 in the United States, and 1.68 in Malaysia. The Reserve Bank has been reluctant to talk down the currency for much of this year, despite its strong jawboning of the dollar in December when it fetched an average of 89.78 US cents.īut the rate of inflation is such that it is making it difficult for the RBA to convincingly suggest it will take action to lower the currency. The Aussie remained well above 90 US cents in past weeks, fetching about 94 cents in early trade on Monday.
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