Forint only slightly undervalued, based on Big Mac index

EU

pixabay, photosop by chris

According to the latest Big Mac Index released by The Economist, a Big Mac sandwich in fast food chain McDonald’s costs HUF 862 in Hungary, corresponding to USD 3.43. This means that the forint is undervalued by 2.5% against the U.S. dollar.

The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level, the business magazine explains.

The index is based on the theory of purchasing power parity (PPP), the notion that, in the long run, exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (or, in this case, a burger) in any two countries.

According to the index, Poland and the Czech Republic have strong links to the euro area and robust GDP growth. The Polish złoty is undervalued by 44% against the dollar, and the Czech koruna by 28%. Compared to these, the forint is undervalued by only 2.5% against the U.S. dollar, calculating with a price of HUF 862 for a Big Mac, The Economist states, as cited by Hungarian business news portal vg.hu.

Based on the raw data of the index, the forint has been continuously depreciating against the U.S. dollar, by 35-40% since January 2016. But according to the adjusted data, the actual value has been roughly at the level of its normal value, vg.hu notes.

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