franc its most overvalued The second column calculates Big Mac PPPs by dividing the local currency price by the American price. For instance, in Japan a Big Mac costs 4262. Dividing this by the american price of $2.90 produces a dollar ppp against the yen of <90, compared with its current rate of 4113, suggesting prices in the euro area)is 13% overvalued. But perhaps the most interesting finding is that ac that the yen is 20% undervalued. In contrast the euro(based on a weighted average of Big mac emerging-market currencies are undervalued against the dollar. The Chinese yuan, on which much ik has been spilled in recent months, looks 57% too cheap. The Big Mac index was never intended as a precise forecasting tool. Burgers are not traded across borders as the ppP theory demands prices are distorted by differences in the cost of non-tradable goods and services, such as rents Yet these very failings make the big mac index useful since looked at another way it can help to measure countries' differing costs of living. That a Big Mac is cheap in China does not in fact prove that the yuan is being held massively below its fair value as many American politicians claim. It is quite natural for average prices to be lower in poorer countries and therefore for their currencies to appear cheap The prices of traded goods will tend to be similar to those in developed economies. But the prices of non-tradable products such as housing and labour-intensive services are generally much lower. A hair-cut is, for instance, much cheaper in Beijing than in New York One big implication of lower prices is that converting a poor country,'s GDP into dollars at market exchange rates will significantly understate the true size of its economy and its living standards. If China's gDP is converted into dollars using the big Mac PPP, it is almost two-and-a-half-times bigger than if converted at the market exchange rate Meatier and more sophisticated estimates of such as those used by the IMf, suggest that the required adjustment is even bigger.franc its most overvalued. The second column calculates Big Mac PPPs by dividing the local currency price by the American price. For instance, in Japan a Big Mac costs ¥262. Dividing this by the American price of $2.90 produces a dollar PPP against the yen of ¥90, compared with its current rate of ¥113, suggesting that the yen is 20% undervalued. In contrast, the euro (based on a weighted average of Big Mac prices in the euro area) is 13% overvalued. But perhaps the most interesting finding is that all emerging-market currencies are undervalued against the dollar. The Chinese yuan, on which much ink has been spilled in recent months, looks 57% too cheap. The Big Mac index was never intended as a precise forecasting tool. Burgers are not traded across borders as the PPP theory demands; prices are distorted by differences in the cost of non-tradable goods and services, such as rents. Yet these very failings make the Big Mac index useful, since looked at another way it can help to measure countries' differing costs of living. That a Big Mac is cheap in China does not in fact prove that the yuan is being held massively below its fair value, as many American politicians claim. It is quite natural for average prices to be lower in poorer countries and therefore for their currencies to appear cheap. The prices of traded goods will tend to be similar to those in developed economies. But the prices of non-tradable products, such as housing and labour-intensive services, are generally much lower. A hair-cut is, for instance, much cheaper in Beijing than in New York. One big implication of lower prices is that converting a poor country's GDP into dollars at market exchange rates will significantly understate the true size of its economy and its living standards. If China's GDP is converted into dollars using the Big Mac PPP, it is almost two-and-a-half-times bigger than if converted at the market exchange rate. Meatier and more sophisticated estimates of PPP, such as those used by the IMF, suggest that the required adjustment is even bigger