Wednesday, August 03, 2011

Fun with Burgernomics

Anyone teaching economics will have more fun with The Economists' Big Mac index (BMI) than purchasing-power-parity (PPP). The magazine's editors even evoke "Beefed-up burgernomics" in this week's 25-year celebration of the index's existence.

It would be lovely if a PPP-based judgment on what is "overvalued" or "undervalued" were sufficient to guide currency trades.  Investors hold currencies for all sorts of reasons, including current-year trades of goods and services, but much more is usually at stake. 

This week's write-up discusses the flaws of the BMI, but then introduces results of a cross-section regression on another flawed index, GDP per capita.  Observations off the estimated "line of best fit" indicate over/undervaluation currency valuation. 

Nice. But I think I'll just keep on looking for a Holy Grail indicator that will make me rich.  It must be here somewhere, I must be getting closer. :-)