Which index is used to identify potentially overvalued or undervalued currencies?

The Big Mac index serves as a useful tool for assessing whether a currency is overvalued or undervalued compared to another currency. This index is based on the purchasing power parity (PPP) theory, which suggests that in the long run, exchange rates should adjust so that identical goods cost the same in different countries. The Big Mac, being a standardized product available in many locations worldwide, provides a practical way of comparing the relative value of currencies.

By comparing the price of a Big Mac in various countries with the price in the United States, one can gauge whether a currency is undervalued or overvalued in relation to the US dollar. For instance, if the price of a Big Mac is significantly lower in a certain country compared to its price in the US, the currency of that country may be seen as undervalued. Conversely, if the price is higher, the currency could be considered overvalued.

Other indices, such as the World equity index monitor or the World inflation monitor, focus on different aspects of the economy and do not specifically address currency valuation in the same way as the Big Mac index. The custom index generator does not provide a standardized metric like the Big Mac index, which is specifically designed for comparing purchasing power across