The Big Mac index is one\u00a0initiative, created by The Economist, that aims to measure whether currencies are at their \u201ccorrect\u201d level.<\/p>\n
It is based on the theory of purchasing-power parity (PPP) – the notion that, in the long run, exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a Big Mac burger) in any two countries.<\/p>\n
The Bic Mac is selected for comparison as the popular fast-food meal is widely available across the world, and remains fairly consistent in pricing; however, it is by no means an exact science.<\/p>\n
“Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible,” The Economist said.<\/p>\n
The\u00a0index has however, become a global standard, included in several economic textbooks while also becoming the subject of at least 20 academic studies, the group noted.<\/p>\n
South Africa’s “real” currency value<\/h3>\n
In the USA, a Big Mac sells for $4.79 as of January 2015 – in South Africa the price is $2.13 (R25.50).<\/p>\n
This means that a South African in the USA would expect to pay R57.46 for the same product that costs R25.50 locally.<\/p>\n
In order to reach pricing parity, the value of the South African currency would have to sit at R5.32 to the dollar.<\/p>\n
This shows that the rand is undervalued by 57%.<\/p>\n
Data from the World Bank points to similar PPP values, showing that between 2010 and 2014, South Africa’s currency carried an average PPP trade value of R5.11 when purchasing its selected basket of goods.<\/p>\n
According to the Economist, a fairer measure of a currency’s fair value would be to look at\u00a0the relationship between prices and GDP per person.<\/p>\n
“The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation,” it said.<\/p>\n
According to the World bank, South Africa has a GDP per capita of $12,506.70 (in international or PPP dollars), versus the US GDP per capita of $53,042.00.<\/p>\n
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