Big Mac index: kroon undervalued

  • 2003-01-23

The latest calculations of The Economist's Big Mac index showed that the Estonian kroon remains undervalued by about 29 percent in relation to the U.S. dollar, showing a sharp rise from April last year.

The strength of the kroon, which is tied to the euro, is due primarily to the European common currency's strengthening against the dollar. Last April the Big Mac index, which is used to gauge purchasing power parity between countries, showed a 35 percent disparity between the U.S. dollar and the Estonian kroon.

The Economist's Big Mac index did not mirror Estonia in 2002, but according to this year's index a Big Mac costs the equivalent of $1.93 in Estonia, as compared with the earlier $1.62 in April 2002.

The base indicator of the index is the cost of a hamburger in the United States, which the latest index puts at $2.65 compared with $2.49 a year ago.

According to the renowned indicator, the most expensive national currency is the Icelandic krona, with a disparity of 110 percent.

The Latvian and Lithuanian currencies are not included in the Big Mac index.

The index is based on the theory that exchange rates of different countries' currencies should gradually move to a level where identical goods cost more or less the same amount of money. The Big Mac, which is sold in almost 120 countries throughout the world, is the ideal product to measure an identical good made in different economies.