Our latest Big Mac index suggests that most currencies remain undervalued against the dollar
The Economist, 1/15/2020
FEATHERS WERE ruffled in America in the great chicken-sandwich war of 2019, an online fight involving rival brands and their aficionados. But for economics enthusiasts the fast-food dish of choice will always be a McDonald’s Big Mac, whose price underlies the Big Mac index, The Economist’s light-hearted guide to global exchange rates. According to our latest batch of data, most currencies have strengthened against the dollar in recent months, as trade tensions between America and China have eased and global-growth prospects have improved. Still, the greenback remains strong by historical standards and may yet fall further in 2020.
The Economist’s Big Mac index is based on the theory of purchasing-power parity, which holds that exchange rates should adjust until the price of an identical basket of goods costs the same everywhere. Our basket has just one item, a Big Mac. The double-decker sandwich is uniquely suited for such an analysis thanks to its consistency (it is nearly identical everywhere) and ubiquity (it is sold in more than 100 countries). Consider the Chinese yuan. A Big Mac costs 21.50 yuan, or $3.12, in China, compared with $5.67 in America. Burgernomics would suggest, therefore, that the yuan is 45% undervalued against the dollar; adjusted for GDP per person, it is roughly 8% below fair value.
Which currencies are most over- and under-valued by this measure? Only two, the Norwegian krone and Swiss franc, look dear relative to the dollar. Elsewhere, currencies seem cheap, and some have become more so. In Chile, which has been rocked by anti-government protests since October, the peso is now undervalued by 40% against the dollar according to our index. The Turkish lira, meanwhile, is undervalued by a whopping 61% against the greenback. In October Turkey invaded north-eastern Syria following the withdrawal of American troops by President Donald Trump, sending the lira tumbling. In recent weeks tensions between Iran and America have also rattled currency markets, pushing investors towards safe-haven currencies such as the Japanese yen and the Swiss franc.
Looking ahead, most economists expect growth in the global economy to accelerate in 2020, and the dollar to depreciate. For Mr Trump, who has an appetite for both Big Macs and a weak dollar, this would be something to relish.