|A Foster City Big Mac is $3.99|
In America, a Big Mac costs $5.04 on average. In Hong Kong, by comparison, the same burger costs the equivalent of $2.50 or so....In Hong Kong, where the Big Mac costs 19.20 Hong Kong dollars, that hypothetical exchange rate would be 3.81 Hong Kong dollars [blogger's note: HK$ 19.20 divided by US $5.04] to the greenback. The real, market exchange rate is much weaker: it takes 7.75 Hong Kong dollars to buy one of the American sort. According to the Big Mac index, then, the Hong Kong dollar is heavily undervalued—by more than half.This anomaly is what keeps arbitrageurs in business; they could take US$ 5.04, convert it at 7.75 to HK$ 39.06, and get two Big Macs in Hong Kong for the price of one in the U.S. There might even be enough left over for a small order of fries.
Even more interesting is that China now has the world's largest economy as measured by "patty purchasing power."
If a country spent its entire annual income on Big Macs, how many burgers could it buy? America’s GDP is forecast to be over $18.5 trillion this year, according to the IMF. That translates into almost 3.7 trillion burgers at a little over five bucks apiece....China’s GDP will be a little over 73 trillion yuan this year, says the IMF, or less than $11.4 trillion. But in China, a Big Mac costs only 18.6 yuan. So its GDP is equivalent to over 3.9 trillion burgers, over 5% more than the American total.Of course, I had to verify such an astounding revelation with my own eyes and went to the Foster City McDonald's, where the Big Mac costs $3.99. At that price---and we're in one of the priciest areas in the country---the U.S. can buy 4.6 trillion burgers. Whew! China still has to ketchup.