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Big Mac shows rand is underbeefed
CURRENCY VALUES
THE rand is 27% undervalued against the US dollar, according to the "Big Mac" currency index published by The Economist. The hamburger standard takes the prices of McDonald's "Big Mac" in 32 of the 100 world markets in which it is sold and compares it with the average US price at current exchange rates. In the US a Big Mac costs $2.42. The SA price of R7.80 gives an implied dollar purchasing power parity of R3.22 against the actual exchange rate of R4.43 to the dollar. The SA Big Mac, however, is not the cheapest in the global village. In China the yuan price of 9.70 equates to $1.16, putting Beijing's hamburger index at a discount of 52% to purchasing power parity (PPP). And at 4.3 Polish zlotys, a Warsaw Big Mac is $1.39, some 43% below its dollar PPP. Most expensive is the Swiss burger. At Sfr5.90 it is equal to $4.02, which makes the implied value of the dollar Sfr2.44 instead of the actual Sfr1.47 (after a recovery). By the same measure the Swiss franc is 66% too high with the Danish kroner (63%) and the Israeli shekel (40%) not far behind. The Economist concedes that its Big Mac measure is not a perfect indicator because prices can be distorted by trade barriers on beef, sales taxes and cost variations such as rentals. But it says Robert Cumby, an economist at Georgetown University, Washington, has done research which suggests that any currency's deviation from the Big Mac index can be "a useful predictor of exchange rates" - having correctly indicated the trend of eight of 12 large economies' currencies in the last year. "Of the seven currencies which changed by more than 10% (against the dollar), the Big Mac standard got the direction right in six cases," noted The Economist.
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