The literature on exchange rate forecasting and the out of sample evaluation has basically started with the work by Meese and Rogoff (1983). They were the first to show that the basic random walk model outperforms other economic models of exchange rate in terms of forecasting.
I discussed in a previous post about the shortcomings of the Big Mac Index and how these issues might lead to misuses of this index. As one would expect, there is a thin academic literature which discusses or uses the Big Mac Index, however the studies that exist make some interesting points which deserve to be mentioned.
Now and then, we might hear from diverse people, especially politicians, about the terrible problem of trade deficit. Take for example the recent report by Bergsten which calls for a plan of action to force China to let its currency appreciate in order to have the US trade deficit diminished.
The Big Mac Index is a popular measure of the degree of undervaluation or overvaluation of a certain currency with respect to US dollar (or any other world currency). It is based on the purchasing power parity theory.