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# The shekel/dollar and the Big Mac index

Does the famous Big Mac index reflect the true ratio between the shekel and the dollar? First article in a series from the pen of Reuter-Meaden investment managers

By Moshe Midan, CEO of Reuters Midan
The Big Mac index was "invented" about two decades ago by the British economic newspaper "The Economist". He compares the price of a McDonald's Big Mac (single, not a meal... for the hungry among us) in different countries. The idea expressed by the index is based on the PPP theory -Purchasing Power Parity, which is useful for comparing the standard of living in different countries. The basis of the idea is that a dollar should buy the same product (or basket of products) in each country (without a surplus remaining, it will be lacking), therefore a situation should be created in which the ratio between the currencies equals the price ratio in each country.
Let's say that a Big Mac costs 4 dollars in the USA, while in England it costs 3 pounds, the PPP ratio should be 3 pounds for every 4 dollars. If the currency ratio (exchange rate) is 1 dollar to 1 pound (of course not current...), then the PPP theory holds that over time the exchange rate will have to converge to the PPP ratio, that is 1.3333 dollars to the pound.
Of course, there are quite a few objections to this theory and the basis of its assumption that the prices of the products in each country should be the same. In many cases this is not the case. Those products that are considered inferior in country A will be considered normal products in country B and so on. However, and looking at the "large" significant distortions between the exchange rate and the ratio
The PPP can certainly point to a gap that may close at least partially.
So what about the shekel/dollar?: The exchange rate is 4.21 (as of the writing of the article), the price of the meatball in Israel is 15.5 NIS and the price in the USA is 3.1 US dollars. It follows that the PPP ratio is 5 !!! (In dollar terms, the meatball costs \$3.68). According to the theory, the exchange rate should converge to 5 shekels to the dollar, or in other words the shekel is strong against the dollar by about 19%.
So, of course, in the eyes of the Israeli consumer, the meatball counts more than in the eyes of the American consumer. And it is certain that there are many other matters (such as kosher, etc.) that do not allow identical prices here and in the US and this creates a distortion in the general model, but nevertheless, even if we take a "true third" there is still, according to the model, room for a 5 percent depreciation against the dollar. But this is the way of theories, they often crash against the rocks of facts. It is also worth noting that there are considered currencies in which the gaps are even greater, so we are not reinventing the wheel.
The state of the Israeli economy from a macroeconomic point of view is excellent. Despite the differences in interest rates between us and the US, the flow of funds here and the desire of foreigners courting the Israeli economy to convert dollars into shekels continues to strengthen the shekel against the dollar. I estimate that when the wheel starts turning, some will remember the Big Mac index and explain how justified the wheel is turning...

1. The dollar rate today is 3.45, it seems that the writer was quite mistaken.
The Big Mac index is not so good, especially since it only measures one product.
Besides, what about the wages, customs, transport prices, etc. They should also be considered.
In conclusion, the index is not good

2. asterisk Responded:

The Big Mac index reflects a certificate of poverty for the Israeli economy - and not the other way around...

The meal at McDonalds costs as much as it is worth...it is no more expensive than any other fast food meal.

3. There is a luxury and fitness center that used to be near the Dan Hotel in Tel Aviv and now it is adjacent to Migdal Shalom and is relatively expensive. Of course there are many Chinese fast food restaurants such as Sinispeed. I do not keep kosher, so the variety in Israel is not bad, although it could be better.

4. Strong Responded:

Are there kosher Chinese restaurants in Israel?

5. He did not talk about the whole meal, only about the specific sandwich - a Big Mac at the time the article was written, and in fact until this week. Just today it was reported in YNET that McDonald's is raising the prices of most of its products. In doing so, it will further distort the Big Mac index.
And if you're hungry, it's better to go to a good Chinese restaurant. It's not much more expensive, and contains more vegetables, and is also tastier, but this is of course my personal preference.

6. Ami Bachar Responded:

Very interesting article. Just where did you get the figure of NIS 15 for McDonald's? When I eat there they take exactly double from me.

For that matter, sums of NIS 30 are also usually taken at Burger Ranch, Burger-King and similar businesses that provide hamburgers to the consumer.

I am very petty - but still, if we talk about the strength of the shekel against the dollar and the PPP index...
I got hungry

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