Let's pretend Jersey had an independent currency and then calculate its position on the Economist's Big Mac Index.

The Big Mac Index is a simple indicator or rough estimate illustrating the theory of purchasing-power parity (PPP) since the Big Mac hamburger is consistently available in 120 countries [1]. The PPP theory is based on the law of one price, that is to say that in an efficient market identical goods should have one price[3].

Using the last published Index on July 2nd, 2007, this is how Jersey would appear with a Big Mac priced locally at 2.10, mainland UK remains 1.99.

  Big Mac prices Implied PPP of the dollar Actual dollar exchange rate Jul 2nd Under (-)/over(+) valuation against the dollar %

in local currency

in dollars
United States $3.41 3.41      
Canada C$3.88 3.68 1.14 1.05 +8
Jersey, Channel Islands 2.10 4.11 1.62 2.01 +24
United Kingdom 1.99 4.01 1.71 2.01 +18

Thus, it suggests that the Jersey Pound (JEP) is 24% overvalued against to US dollar. However, the Jersey Pound is in currency union with the United Kingdom; it's not an independent currency, but a variant of the British Pound[2]. Therefore, I believe the Big Mac index is reflecting Jersey's higher input costs (rent, wages, transport costs) relative to the mainland UK.

What do you think?


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- Dollars per pound
[1] Twenty Years of the Big Mac index, Economist.com, May 25, 2006. http://www.economist.com/finance/displaystory.cfm?story_id=E1_GJSNQSS

[2] The Jersey Pound, http://en.wikipedia.org/wiki/Jersey_pound, 10 November 2007
[3] Purchasing Power Parity, http://en.wikipedia.org/wiki/Purchasing_power_parity, 10 November 2007.