The “law of one price” holds that identical goods should trade for the same price in an efficient market. But to what extent does it actually hold internationally?
The Economist magazine’s famous Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.
But burgers travel badly. So in 2013 we created our own index — one that better meets the condition that the product can flow quickly and cheaply across borders.
The Geo-Graphics Mini Mac Index compares the price of iPad minis across countries. iPad minis are a global product that, unlike Big Macs, do in fact travel the Earth with their owners.
As can readily be seen in the graphic above, our Mini Mac Index shows that the law of one price holds far better than the Big Mac Index does — as it has done consistently over the past several years. In January, the average overvaluation of the dollar according to the Big Mac Index was 26 percent — a Whopper. According to our Mini Mac Index, the average overvaluation was only 9 percent — small fries. This suggests it’s time to deep-fry their index and move over to ours.
Overall, the Mini Mac Index suggests that the dollar has become slightly more overvalued (up from 5 percent) since the beginning of 2015. The euro is undervalued by 11 percent, and the yen by 10 percent. Having been fairly valued at the beginning of last year, the renminbi — following on the heels of China’s large devaluation in August — is now 5 percent undervalued. This compares with an implausible 46 percent undervaluation on the Big Mac Index. Maybe Congress is lovin’ it, but we think the Economist needs to hold the mustard.
Editor’s Note: This post was originally published on the Council on Foreign Relations’s Geo-Graphics economics blog.