Categories: EconomyNews

South African rand undervalued, according to the Big Mac Index

Published by
Nonhlanhla P Dube

The Economist has revised its Big Mac Index for mid-2022, demonstrating how the rand remains one of the world’s most undervalued currencies in relation to the US dollar.

The Big Mac Index is an initiative created by The Economist in an effort to determine whether currencies are valued at the “correct” level.

It is based on the purchasing-power-parity (PPP) principle, which states that in the long run, exchange rates should gravitate towards a rate that equalizes the prices of an identical basket of goods and services (in this case, a Big Mac burger) in any two countries.

The Big Mac was chosen for comparison since it is widely available and has reasonably consistent pricing; however, it is far from an exact measure.

According to The Economist, “Burgernomics” was never intended to be a precise measure of currency misalignment but rather a technique for making the exchange-rate theory more understandable.

The index, on the other hand, has become a global standard, is featured in multiple economic textbooks, and has been the subject of at least 20 academic studies, according to the organization.

The rand’s ‘real’ value in mid-2022

The Big Mac Index calculates the real value of currencies using two methods: a direct measure of PPP based on raw pricing and an adjusted index based on local GDP statistics.

 The discrepancy between the South African Big Mac price against the US big mac price and the actual exchange rate – R17.04 to the dollar at the time of the study – shows that the rand is 54.5 % undervalued, making it the fourth-most undervalued currency in July, according to the index.

The Venezuelan bolvar and the Romanian leu are the most undervalued currencies by this metric, undervalued by 65.8 % and 55.7 %, respectively. Russia has long been one of the most undervalued currencies, but the conflict in Ukraine has forced McDonald’s to withdraw from the country, leaving no comparison point.

GDP per capita

However, the raw index does not provide a complete picture of currency worth.

Because many say that the cost of producing a Big Mac is lower in poorer nations due to PPP, The Economist considers another significant metric—GDP per capita—to reach a more accurate conclusion. The Economist wrote, noting that “the price of a burger is about what you would expect given the country’s GDP per capita” in most countries.

South Africa’s currency remains highly undervalued (5th) in the group’s adjusted index, but slightly less so than when dealing with pure conversion data.

At market exchange rates, a Big Mac costs 54.5 % less in South Africa (US$2.34) than in the United States (US$5.15) in PPP terms. A Big Mac should cost 21.4 % less based on differences in GDP per person.

The indicator implies that the rand is 42.2 % undervalued and should be roughly R9.85 to the dollar based on variations in GDP per person.

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Nonhlanhla P Dube

Nonhlanhla P Dube is a senior news reporter at Rateweb. Nonhlanhla is a student of International Relations at the University of South Africa. She reports primarily on personal finance and economics. You can contact her directly by email at nonhlanhla@rateweb.co.za

Published by
Nonhlanhla P Dube
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