The Euro continues to fall against the USD, however, should we be surprised? Not withstanding the issues surrounding the current Euro debt issues – currencies will often revert back to what is known as the PPP or ‘Price Power Parity’.
In simple terms this is the buying power that one currency will have against another. A popular way to measure this is via the ‘Big Mac Index’ – that is; a Big Mac should cost the same in London as it does in Lisbon, or Louisiana. As jovial as such a measurement may seem primia fascia, it isn’t quite so whim-sickle.
After all, there are various costs associated with producing a Big Mac, including operations, logistics, raw materials and labour. Based on the Big Mac index at recent levels of Euro/USD 1:40 a Big Mac is costing 25% more in Europe – Euro/USD 1:20 would bring the real cost of a Big Mac in the US and Europe more closely in line with one another..