A currency that even Soros cannot control
Saturday 05 September 1998
The gravity of the crisis in Russia is laid clear by a financial analysis of the price of a Moscow burger. For along with platinum and gold, the Big Mac is a financial yardstick by which the value of world currencies can be measured.
The Big Mac Index was first published by The Economist in 1986 as an exercise in examining how the price of a Big Mac differed in McDonald's restaurants around the world.
It showed that the burger was a very good indicator of the state of the dollar in those countries. In 1993, the index was recalculated to show the over- or undervaluation of each local currency against the dollar.
As the Big Mac celebrated its 30th birthday, a snapshot survey by The Independent found the Big Mac ($2.63 in the US) did indeed work like a financial barometer.
A Muscovite will find the plunging rouble has 71 per cent less purchasing power when it comes to buying the burger. In the UK, the strength of the pound secures a Big Mac for pounds 1.84 but hints at a 17 per cent overvaluation of sterling. The world's most expensive Big Mac can be found in Helsinki where Finns pay the equivalent of about pounds 2.40, but the index indicates their currency is overvalued by 44 per cent.
Looking back over the last decade, shrewd investors could have avoided the worst of the Asian crisis by using the index. As long ago as 1989, it showed there were problems ahead, with South Korea overvalued by 78 per cent and the Japanese yen 38 per cent overvalued compared to the dollar.
The theory behind the Big Mac Index is based on purchasing power parity (PPP), the idea that a shopping basket of identical goods should (in theory) cost the same in all countries. In this case, the Big Mac is the basket item and dividing a country's local currency price for the burger by the Big Mac's dollar price gives the Big Mac's PPP. The index has become a fixture of financial analysis and is now published quarterly.
The Golden Arches Standard
Cost of a Implied Dollar exchange Under/over-
Big Mac PPP* rate, 4 September valued against
US$, as %
Russia 13 roubles 4.94 17 -71
Hong Kong 10.20 HK dollars 3.88 7.74 -50
Finland 20 markka 7.60 5.28 +44
South Africa 8 rand 3.04 6.23 -51
Mexico 15.6 peso 5.92 10.2 -42
Japan 280 yen 106 134 -21
UK pounds 1.84 0.7 0.598 +17
US $2.63 - -
* purchasing power parity - the local price divided by the dollar price
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