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Lesson 8 of 10

Exchange Rates and Purchasing Power Parity

EconomicsIntermediate

What Actually Moves a Currency's Value

An exchange rate is simply the price of one currency in terms of another. It moves on the same supply-and-demand logic as anything else: higher demand for a country's exports, higher interest rates attracting foreign investment, or greater political stability all tend to push a currency's value up relative to others.

Real, current figure: as of July 24, 2026, one euro traded for about $1.1367 - down roughly 3% from the 2026 year-to-date average of $1.1641, with the euro having ranged between $1.1356 and $1.2019 over the year so far. Source: exchange-rates.org, x-rates.com, EUR/USD historical data.

The Big Mac Index: PPP Made Edible

Purchasing Power Parity is the idea that, adjusted for exchange rates, the same basket of goods should cost roughly the same everywhere - if it doesn't, a currency looks over- or under-valued. The Economist's famous (only semi-serious, genuinely useful) Big Mac Index applies this to one standardized product sold in nearly every country.

text
Big Mac price, January 2026 (approx., in USD):
  United States:   $6.12
  Switzerland:     ~$9
  Taiwan:          $2.47

A Big Mac costing far less in Taiwan than the US (once converted to
dollars) suggests the Taiwanese dollar is undervalued relative to PPP -
or that local costs (rent, wages, ingredients) are genuinely lower,
which the index doesn't fully separate out.

It's intentionally a rough tool, not a precise valuation model - local taxes, wages, and rent all distort a Big Mac's price independent of currency valuation. But it's a genuinely useful gut-check: when a currency looks wildly cheap or expensive on this simple measure, it's often a real signal worth digging into further, not just noise. Source: The Economist Big Mac Index, most recent published edition.