Burgernomics : Country’s Currencies Which Are Overvalued

Burgernomics : Currencies Which Are Overvalued

Burgernomics is a lighthearted piece of research that is completed by the Economist magazine on an annual basis. Also known as the “Big Mac Index” it provides a comparison of the cost of burgers throughout the world from a global fast food chain and uses this analysis as a means of providing insights into which country’s currencies are over or undervalued.

First started in 1986, the research takes the price of the burger in each country examined and divides it by the prevailing US Dollar exchange rate at the time to produce an analysis of the purchasing-power parity (PPP) between the US and the expat destination. PPP theory states that, over a long enough time, exchange rates should adjust so that similar goods, such as Big Macs, cost the same across countries. However, this is not the case and variations in the prices of these standard goods provide an indication of which currencies are over and undervalued. For example, at current market exchange rates, the Canadian version of the burger costs $5.39 USD, compared with an average price of $4.37 in America. This entails that the Canadian dollar may be roughly 24% overvalued relative to the USD.

This year’s results indicate that India, South Africa and Hong Kong have the world’s most under-valued currencies, with burgers in these countries costing an average of $1.67, $2.03 and $2.19 respectively, while Venezuela, Norway and Sweden are the most overvalued with burgers in these countries setting fast food diners back by $7.84, $7.12 and $5.64. The UK, United States, Chile, New Zealand and Costa Rica are rated as being in the -/+ 10% for their currencies, meaning that their PPP is level.

The Big Max Index Results

According to Ryan Avent, chief economist at The Economist, burgernomics may be a fun analysis but it does provide a rough overview of changes in worker wages/productivity globally and an insight into the ways in which global currencies are performing: “When you look at a country like India or Mexico, labor there is much cheaper than it is in the U.S. or in Europe,” Avent says. “And that really has to do with productivity differences…so one thing we’re measuring is productivity gaps between different countries and how far along these places are in terms of development and growth with the richest countries.”

Author: ExpatInfoDesk