By way of introduction, purchasing power parity (PPP) is the idea that the price (ie exchange rate) of one particular currency should reflect the amount of goods and services which can be bought when compared with other currencies.

For example, the exchange rate between GBP and Euros is around €1.15 to £1 at the time of writing and you should therefore be able to buy the same goods or services with £1 as you can with €1.15.

Deviations from this PPP can be used to determine the relative strengths and weaknesses of currencies and can also reflect different monetary policy regimes such as the current relative strength of the Swiss Franc as people pile their money in that supposed safe haven.

Now you have some background, below is the current version of the Big Mac Index from The Economist which shows some rather extreme divergence away from PPP and gives a good view of where the strong and weak lie amongst the worlds currencies as well as why the US is getting increasingly annoyed with China and the Renimbi :

A WEAK currency, despite its appeal to exporters and politicians, is no free lunch. But it can provide a cheap one. In China a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America the same burger averages $3.71. That makes China’s yuan one of the most undervalued currencies in our Big Mac index, which is based on the idea of purchasing-power parity. This says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. At just $0.15, it is undervalued by about 40%. The tensions caused by currency misalignments prompted Brazil’s finance minister to complain last month that his country was a potential casualty of a “currency war”. The Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list.

From that graph it doesn’t look like a great idea to be buying a Big Mac in Europe right now (although personally, there is never a good time to buy one!)