If only economic theory was as simple as burgernomics – a straightforward guide to working out whether a currency is under or overvalued against the dollar based on the price of a Big Mac burger.
Table of contents
The index was devised in 1986 by the revered The Economist magazine as a goofy way of explaining currency exchange rates.
The underlying principle is that identical goods or services in two countries should be the same- with some adjustments for the price of ingredients and labour adjusted for poorer and richer countries.
The index offers raw data and adjusted comparisons for 48 countries.
With the dollar pegged at the base rate of zero, a Big Mac costs $4.93 in the USA. The Philippines and Peru also sit on the zero mark, showing their currencies are valued correctly against the dollar.
Overvalued currencies
Seven countries show as having overvalued currencies against the dollar – Israel, Sweden, Switzerland, Pakistan, Thailand, Brazil and Turkey.
The first six are within a 10% range of the dollar – but Turkey is listed as 10/5% overvalued and the heads the list.
Russia sits at the other end of the table, undervalued by 52% with a Big Mac costing $1.52.
Sitting at less than 10% undervalued are Hungary, South Korea, the UK, the Eurozone, Mexico, China and Chile.
What the results suggest is that a significantly undervalued rouble should be making Russian exports considerably cheaper and buyers should be queueing on The Kremlin as demand escalates.
Exchange rate theory tool
Of course, they are not because although the table indicates the true level of a currency, factors such as sanctions for Moscow’s support of the annexation of The Crimea from Ukraine and sanctions imposed by western governments are not considered.
According to the index, the four major currencies sitting with the dollar are undervalued – the pound and euro at 7.6%, the Chinese yuan or renminbi at 9.4%, while the Japanese yen is way down the table at 25.2% undervalued.
“Burgernomics was never meant as a precise way to value a currency,” said a spokesman for The Economist.
“It’s a tool to help people understand exchange rate theory. Think of the valuation as a fair guide to what a currency is worth.”
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