Big Mac Index, why not just use a basket of currencies?

Discussion in 'Forex' started by Daal, Jul 18, 2006.

  1. Daal


    Why not create a basket of currency prices(converting everything to usd and them avareging it creating a currency index) and then compare the individual currencies and how much they are worth against it overtime and rank them, wounldnt that be much more accurate?
  2. Dollar index
  3. Daal


    But how can you compared say CAD with the dollar index?
  4. More accurate than what?
  5. I think you're missing the point...
  6. I'm just trying to understand the question. Perhaps I should've been more direct with my response, and phrased it better, i.e.

    Yes, of course some form of relative PPP is better than absolute PPP. Who looks at the absolute PPP? The hamburger index ("Big Mac") is purely and simply absolute PPP, and offers nothing (i.e. tradeable information).

    Now, relative PPP, combined with other fundamental information, may yield results, though I doubt many here would be interested in said results. Constructing a meaningful relative PPP measurement, I probably don't have to say, is very complicated.

    Absolute PPP is for the press to use in order to sound sophisticated...

    What do you think fortunatti?
  7. When the dollar index is:

    Above 90 = bullish for the dollar

    Below 90 = Bearish for the dollar

  8. Daal


    thats not exactly what im after, I just want a more efficient ppp model
  9. The Big Mac Index, or PPP for that matter, is used to forecast exchange rates, though rather inaccurately. What sense does it make to use a basket of exchange rates to forecast one?
  10. Daal


    ppp is mean reverting
    #10     Jul 24, 2006