Currency Misvaluation, Currency Indexes, and Adjusted versus Raw Big Mac Prices

Abstract

For each of The Economist’s two Big Mac methods of intrinsic currency valuation (raw and adjusted), this study compares estimates of currency misvaluation versus different effective exchange rate (EER) baskets: weighted equally, by GDP, by equity market capitalization, and by financial wealth. All of these EER basket types imply a consistency between two currencies’ EER misvaluation and the bilateral misvaluation of the two currencies versus each other. For the adjusted Big Mac method, the EER misvaluation estimates are fairly consistent with each other across the different basket types.