The Index compares the price of McDonald’s Big Mac in 32 countries.
Israel is third most expensive country in the world according to the Big Mac Index, published by the "Economist" every year. The prices are based on April’s data.
The Big Mac Index compares the price of a McDonald’s Big Mac hamburger in 32 non-US countries to the price in the US. This ratio is then compared to the foreign exchange rate. If the hamburger ratio is higher than the foreign exchange ratio, then in theory, the currency is overvalued; this harms exports and encourages imports. If the hamburger ratio is less than the foreign exchange ratio, then the currency is undervalued; this encourages exports and discourages imports. According to the "Economist": "The underlying idea is that in the long run, the exchange rate between two currencies should move towards the rate that would equalize the prices of an identical basket of goods and services in the two countries". In this case, the basket of goods is a lonely hamburger.
The country with the most over-valued foreign exchange ratio in 1997 is Switzerland (66%). Second is Denmark (63%). Third is Israel (40%). In 1996 the Israeli foreign exchange ratio was only over-valued by 27%, tied for ninth place. In 1997, the most undervalued currency is that of China (51%).
A Big Mac costs $2.42 in the US. At a foreign exchange rate of NIS 3.38, the Big Mac should sell in Israel at NIS 8.18. Since the actual price is 40% higher, at NIS 11.5, the conclusion is that the shekel is very strong versus the dollar. In comparison, the price of a Big Mac in China is $1.16. Therefore, the yuan is weak against the dollar.