In the most fundamental sense, forex trading is about the differences in the real value of currencies. Money represents the value of a given economy.
And the prices of things within a country usually determine the long term price of currencies. Currency pairs fluctuate around those differences. But what does a McDonald’s hamburger have to do with that?
The Big Mac Index
For those who don’t know, the Big Mac Index is published by The Economist. It’s an unofficial way of measuring the relative value of currencies. The technical term for it is an informal measurement of PPP (which we’ll get to later). It turns out to be reliable enough to guide policy.
How it works is that McDonald’s makes its signature hamburger with the exact same ingredients no matter where it is in the world. And, manufacturing it requires a broad mix of consumer goods. These include meat, vegetables, … Read the rest