Big Mac Index suggests the rand is hugely undervalued
The rand is 57.9% undervalued, according to The Economist magazine’s latest Big Mac Index.
Rather than the R13.32 to the dollar it was trading for on Wednesday morning, the rand should be about R5.60 to the dollar, according to The Economist’s "Burgernomics".
The Economist’s latest Big Mac index published on July 11 rated only the Swiss franc and Swedish krona as overvalued, measured by the price McDonald’s charges for its Big Mac burger in those countries versus the US.
"A Big Mac costs Sf6.50 in Switzerland and $5.51 in the US. The implied exchange rate is 1.18. The difference between this and the actual exchange rate, 0.99, suggests the Swiss franc is 18.8% overvalued," The Economist said.
The most undervalued currency is Egypt’s pound, trading at a discount of 68.2% to the dollar, judging from how McDonald’s has priced its burgers in Egypt.
The next most undervalued currency is the Ukrainian hryvnia, followed by the Russian rouble and Malaysian ringgit.
The rand ties as the ninth most undervalued currency with Azerbaijan’s manat.
"The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their ‘correct’ level," The Economist’s website said.
"Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies. For those who take their fast food more seriously, we also calculate a gourmet version of the index for 48 countries plus the euro area."
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