The index is based on the idea that the rate of exchange between currencies should reflect the price people pay for the same goods and services from one country to the next. Economists call this the theory of purchasing-power parity.
The Economist looks at just one item, a Big Mac, in roughly 50 countries around the world as a standard measure of value. The index isn't perfect; in India, they don't serve Big Macs, so the editors had to substitute a Maharaja Mac, which is a chicken sandwich.
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By converting the local prices into dollars, the index provides an indication of whether the dollar is over or undervalued in a given country. The more dollars you have to pay for the same Big Mac in a given country, the more the U.S. currency is overvalued in that local economy.
In July, for example, a Big Mac went for 48 kroner ($7.77) in Norway and only $4.80 in America, which means the kroner was overvalued by 62 percent, making it the most overvalued currency in the index. The same burger costs just $1.62 in Ukraine, which makes the local currency, the hryvnia, the weakest currency in the basket.
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The magazine has made an annual event of their burger binge since 2000, tracking the dollar's ups and downs around the world. The latest reading indicates that—despite the Federal Reserve's historical effort to suppress interest rates—the global value of the dollar has been rising.
The average valuation of the currencies in the index (weighted by GDP) has moved from roughly neutral in 2009 to about 15 percent undervalued against the dollar this year. The magazine's editors suggest that's due in part of a variety of global crises, which tend to send companies and investors looking for relative safety by moving money into the dollar. Those crises range from armed conflict in Ukraine to financial turmoil in Europe.