Trading Components of Big Mac

The Economist has updated its Big Mac index of purchasing power parity for 2005. Because the Big Mac is made and consumed the same way in each country it is sold, it is believed to be a way of measuring the relative value of currencies by its currency converted sale price. However whilst meat, onions, pickle and flour are internationally tradable items these days, labour, electricity and shop rent are not. Two economists have estimated that these non-tradable components of the price make up about 60% and take longer to be adjusted for in currencies than tradable components.

We have updated the Miscellaneous Chart for the Aussie Dollar compared to the US dollar based on the Big Mac Index. The Aussie price of a Big Mac at AUD$3.25 equals US$2.50 when converted to $US and compares to the price of a Big Mac in the USA at US$3.06 implying the Aussie Dollar is 18% undervalued (an improvement from -22% last year).

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