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...