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

The Big Mac index serves as a lighthearted way to measure the purchasing power parity (PPP) between different currencies. By comparing the price of a Big Mac in various countries, it illustrates whether a currency is overvalued or undervalued relative to another currency. This index is based on the idea that in an efficient market, identical goods should sell for the same price when expressed in a common currency. Therefore, if a Big Mac is significantly more expensive in one country compared to another, it suggests that the currency in the more expensive country may be overvalued, while the other may be undervalued. This index is widely circulated and provides an accessible means for individuals and economists to gauge currency valuation in a simplistic manner.

The other options do not focus directly on currency valuation. The World equity index monitor deals primarily with stock market performance across different countries, whereas the World inflation monitor tracks inflation rates. The Custom index generator simply refers to a tool for creating tailored indices and does not pertain specifically to currency valuation. Thus, only the Big Mac index effectively serves the purpose of identifying potentially overvalued or undervalued currencies.