Abstract/Summary

The Economist’s Big Mac index measures the external purchasing power of a currency relative to a common numéraire currency. The Big Mac index is based on the economic theory of absolute purchasing power parity. There are two versions of the index, namely, the Raw Big Mac index and the GDP-adjusted Big Mac index. The bilateral valuations for both versions are conditional on the common numéraire currency. For example, the common numéraire currency is always at fair value, whereas the valuations of the other currencies are measured relative to the common numéraire currency. This paper extends previous research by providing a theoretical framework to calculate exact multilateral valuations for a system of currencies. The methodological extension sheds light on a number of linkages between the bilateral valuations and the multilateral valuations for both versions of the Big Mac index.