Mac became priced lower than other value meals and temporarily stopped being advertised for sale, raising speculation over artificial distortions leading to underpricing.<sup>47</sup> Moreover, findings by Portes and Atal (2014) suggest the Big Mac index is at most a qualitative indicator of the direction of movements in the nominal exchange rate in rich and economically stable economies, while being less effective in forecasting movements in emerging markets.<sup>48</sup> In a similar spirit, CommSec, a unit of Australia’s commonwealth bank, constructs an iPad index in which price differences derive from currency misalignments but are also largely attributed to transportation costs, taxes, and to some extent price discrimination (due to Apple’s large market share). By this measure, Argentina ranks the most expensive place to buy an iPad as of September 2015, costing almost triple that in the US, suggesting an overvaluation of the peso of approximately 64% without adjusting for transport costs and tariffs (see Figure 11). Argentina has high trade barriers, such as tariffs and currency controls, which prevent iPad price adjustment in line with the world market. Therefore, we expect this estimate to overestimate the peso’s overvaluation, such that controlling for these market imperfections, would suggest a lower overvaluation. The caveat of Apple’s potential price discrimination, however, remains.

Rather than comparing prices of single commodities across countries, other measures of PPP equate consumption baskets. This is the spirit of the OECD measure of different price levels by calculating the PPP ratio for private final consumption expenditure.<sup>49</sup>

# **_Purchasing Power Parity (PPP)_**

Lastly, we calculate the peso’s misalignment according to the theory of purchasing power parity, which equates price levels across countries and implies that the real effective exchange rate–measured as the nominal effective exchange rate adjusted for relative consumer price indices–should be constant. If the real exchange rate is below (above) its equilibrium value, it is expected to rise (fall) back towards its fundamental value. This provides a simple tool to back out the misalignment of the peso.

If LOP holds for all commodities then PPP must also hold apart from under certain conditions: when nontradables exist, consumers’ preferences differ, or countries specialize in different goods. We measure the percentage deviation of the real effective exchange rate from its value at a year in which it is considered to be at equilibrium. The adjusted measure of the REER that uses private sector inflation figures yields an alternative measurement of the peso’s misalignment implied by the PPP condition.

In this analysis, we normalize the constant equilibrium value of the real effective exchange rate (REER) to 100 in 2005, considered to be a year of

> government is cooking the books... the gap between its average annual rate of burger inflation (19%) and its official rate (10%) is far bigger than in any other country”. To the extent that Big Mac inflation tracks CPI closely, a big gap is a sign that prices are being managed/misreported due to government intervention. In fact, in 2010, Big Mac inflation was closer to unofficial statistics (25% according to PriceStats) than to official CPI.

> 47 This is supported by _The New York Times_ among many other press releases.

> 48 Portes and Atal (2014) find that Big Mac prices tend to lag overall inflation rates (revealing high price stickiness), using data spanning 1986–2012 for 54 countries.

> 49 Unfortunately, figures are not available for Argentina.

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