On 5 January 2016, the Economist came out with its latest Big Mac index. Also known as the burger benchmark, the index compares the price of a Big Mac around the world. This catchy, if highly incomplete means of comparing the relative purchasing power of different currencies, uses the United States and the US$ as its base. Countries where Big Macs cost less than in the United States (in US$ terms) have weak currencies. Those where they are more expensive have overvalued currencies.
This time the index shows how beefy the US dollar has become. In July 2014, six of the ten main currencies in the index were stronger than the US dollar. Back then the Swiss franc, British Pound, Canadian dollar, Euro, Australian dollar and Brazilian Real were on par or stronger than the US dollar in purchasing power terms. Now only the Swiss franc is. The double layered burger in Switzerland will currently set you back US$ 6.44, a lot more than in the US where it costs US$ 4.93.
- What is driving the Swiss franc’s fall (Le News – 13.08.15)
- Strong Swiss franc driving hotel closures (Le News – 26.06.15)
- Swiss National Bank announcement pushes franc higher (Le News – 10.12.15)
Economics correspondent, Soumaya Keynes reckons the Big Mac index over states Swiss franc overvaluation. There are non-tradable elements such as labour in the cost of a burger. The prices of these elements are driven by the relative wealth of countries and cannot be expected to disappear with exchange rate movements. She reckons the real overvaluation of the Swiss franc against the US dollar is only 2.5%.
The biggest index slider was the Brazilian Real, which slid from being more than 20% overvalued to an undervaluation of more than 30%. This movement mirrors the shift in the Brazilian Real relative to the Dollar. In July one Brazilian Real bought around 45 US cents. Today it only gets you 25 cents. A Big Mac in Rio currently costs US$ 3.35 or R$ 13.50.
The most undervalued major currency is the Russian Rouble, posting a decline from a near 50% undervaluation to around 70% under. A russian Big Mac now costs only US$ 1.53.
So if you get a Big Mac craving while sitting at Moscow’s Domodedovo airport waiting for your flight to Zurich or Geneva it would make good economic sense to get that burger before take off.