1. Finance 40500: International Finance
PPP and the Big Mac

2. We can actually think of a Big Mac as an index of commodity prices

3. Relative dollar Prices (PPP = 100)
Foreign Currency per Dollar

4. As an index, the Big Mac index works pretty well.

5. These figures suggest that deviations from PPP are very persistent!

6. These figures are looking at European currencies during the ERM relative to the German Mark

7. Relative PPP (PPP = 0)
Foreign Currency per Dollar

8. As earnings rise, prices increase
As earnings rise, prices increase. In particular, the non-traded component of prices increases. This should cause an overvaluation of wealthy country’s currencies relative to poorer countries.