“The secret of Big Macs is that they’re not very good, but every one is not very good in exactly the same way.” (Joel Spolsky)
The concept is straightforward: in theory, the same things should cost the same globally. The Big Mac is a great product to compare because it’s sold in over 100 countries and is nearly identical worldwide. When there are price differences in Big Macs between countries, it can indicate potential discrepancies in currency value .
A tasty take on global currency values
The Big Mac Index compares the price of this burger in one country versus another. As of July 2024, Switzerland had the world’s most expensive Big Macs ($8.07) and Taiwan ($2.46) had the cheapest. But let’s explore how this concept works with the rand and the US Dollar.
A Big Mac currently costs $5.70 in the US and R60.50 in South Africa, meaning the PPP exchange rate is about R10.6 to $1. This is significantly different to the actual exchange rate (R1 is currently worth $17.45), suggesting that the rand may be undervalued relative to the dollar. (Calculations based on the exchange rate on 5 November 2024.)
Why is the rand so undervalued?
Several factors could explain why the rand seems undervalued when compared to the dollar:
- Economic conditions: South Africa’s high inflation and unemployment rates tend to suppress the rand’s value.
- Investor sentiment: Despite the recent election results, Global investors may still view South Africa as a higher-risk market, which can decrease demand for the rand.
- Reliance on commodities: South Africa’s economy relies heavily on commodities like gold and platinum, and a drop in global commodity prices can weaken the rand.
A simple snapshot, not an economic tool
Despite its limitations, the Big Mac Index provides a helpful overview of currency values. Local costs, taxes, import duties, and competition all impact Big Mac prices, potentially compromising the index’s accuracy. In South Africa, for instance, the costs of ingredients and wages can vary significantly from those in the US.
Still, the index can help us to spot currency trends over time and it is included in many economics textbooks. A consistently undervalued rand might indicate more considerable economic challenges, such as inflation or low investor confidence.
Last bite
The Big Mac Index makes it a little easier for the ordinary folk to understand currency valuations. It reminds us that everyday prices and financial markets influence exchange rates.
It also explains why South Africans visiting the US often find their money doesn’t go that far. And why Americans travelling to South Africa will probably find that their dollars go much further in Mzansi than they do back home.
While the Big Mac Index isn’t a tool for serious financial decisions, it offers a unique and accessible perspective on international economics, making complex currency concepts easier to digest — perhaps with a side of fries.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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