The “law of one price” holds that identical goods should trade for the same price in an efficient market. But how well does it actually hold internationally? The Economist magazine’s Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to measure the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.
But the law of one price assumes there are no restrictions on, or costs involved in, the movement of goods, and Big Macs travel badly. So in 2013 we created our own Mini Mac Index, which compares the price of iPad minis across countries. Minis are a global product that, unlike Big Macs, can move quickly and cheaply around the world. As explained in the video here, this fact helps equalize prices.
As shown in the graphic at the top, the Mini Mac Index suggests that the law of one price holds far better than does the Big Mac Index. The Big Mac shows the dollar overvalued against most currencies, by an average of 19 percent (a whopper). By contrast, the Mini Mac shows the dollar slightly undervalued—7 percent on average (small fries).
At the outset of Trump’s second term, Treasury Secretary Scott Bessent argued that tariffs would not feed through to consumer prices owing to expected dollar appreciation—driven by reduced demand for non-U.S. currency. By both our Mini Mac metric and more traditional ones, however, the dollar has fallen. The effect has been referred to, broadly, as “Sell America”—a global trend toward reducing exposure to the dollar, U.S. equities, and Treasuries in response to rising fiscal deficits and falling confidence in U.S. institutions, such as the Fed. Broadly speaking, investors have welcomed new menu items such as deregulation and lower corporate taxes, but aren’t buying the full meal deal.
