The Big Mac Index measures the real value of currencies by citing two methods \u2013 a direct measure of PPP using raw prices and an adjusted index that considers local GDP data.<\/p>\n\n\n\n
Using the ‘raw’ direct conversion data, a Big Mac costs R51.90 rand in South Africa (up from R49.90 in 2023) and US$5.69 in the United States (up from US$5.36).<\/p>\n\n\n\n
Using this direct comparison in pricing, the implied exchange rate of the rand is R9.12.<\/strong><\/p>\n\n\n\n The difference between this and the actual exchange rate, R19.19 at the time The Economist did the study, suggests the South African rand is 52.5% undervalued – the 4th most under-valued currency in the analysis.<\/p>\n\n\n Notably, this is a weaker position compared to the last index update in mid-2023, when the rand was the fifth most undervalued currency at the time.<\/p>\n\n\n\n This suggests the rand is moving further away from its \u201creal\u201d value in global markets.<\/p>\n\n\n\n The only currencies more undervalued by this measure are the Taiwanese dollar (58% undervalued), Indonesian rupiah (57.3%) and Indian rupee (54.5%).<\/p>\n\n\n\n GDP per capita<\/strong><\/p>\n\n\n\n One of the bigger flaws of the Big Mac index is that it doesn\u2019t take the full picture into account when evaluating currency differences.<\/p>\n\n\n\n Experts have argued that because of PPP, the cost to produce a Big Mac is typically cheaper in poorer countries, thus skewing the data.<\/p>\n\n\n\n To account for this, The Economist produces a parallel index that factors in the GDP per capita of a country to draw a more accurate conclusion.<\/p>\n\n\n\n In the group\u2019s GDP-adjusted index, South Africa\u2019s currency is still severely undervalued but has shifted up to sixth position.<\/p>\n\n\n\n In PPP terms, a Big Mac costs 41% less in South Africa (US$2.71) than in the United States (US$5.69) at market exchange rates. Based on differences in GDP per capita, a Big Mac should cost 19.5% less (ie, $4.58).Based on differences in GDP per capita, the index suggests the rand is 41% undervalued, and its ‘real’ and fair value should be<\/strong>around R11.32<\/strong> to the dollar.<\/p>\n\n\n Under-valued?<\/strong><\/p>\n\n\n\n A currency is considered undervalued when its value in foreign exchange is less than it \u201cshould\u201d be based on economic conditions. However, currency value isn\u2019t determined objectively and may be undervalued due to a lack of demand, even if a country\u2019s economy is strong.<\/p>\n\n\n\n Other factors are also taken into account, including investors\u2019 appetite for risk and a plethora of local and global conditions that play into a particular market\u2019s stability.<\/p>\n\n\n\n In South Africa\u2019s case, the rand has carried a hefty risk premium priced into markets for some time, with ongoing energy, logistics and infrastructure crises crippling industries and hamstringing growth.<\/p>\n\n\n\n The country also has much to account for with its economic and foreign policies, which coloured much of the rand’s story in 2023.<\/p>\n\n\n\n All of the local issues are baked into this risk premium and have kept the currency significantly weaker relative to its “fair value”. However, the unit is also subject to wider global issues and market sentiment that often throws the rand in with other blocs – such as risk-off sentiment impacting all emerging markets.<\/p>\n\n\n\n According to local economists, the rand is undervalued by as much as R3.00<\/strong><\/a> given these realities, which would put the ‘fair’ exchange rate between R15 and R16 to the dollar. <\/p>\n\n\n\n![\"\"](\"https:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2024\/01\/Big-Mac-Index-Raw-2024.jpg\")
<\/a><\/figure><\/div>\n\n\n<\/a><\/figure><\/div>\n\n\n
\n\n\n\n