The Big Mac Index

Two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun? Well, not exactly. With the U.S. Treasury Department labeling China a currency manipulator how is one to easily size up whether there is parity between the dollar and yuan? One way to do this is with the Big Mac Index, which was invented by The Economist in 1986 to show whether currencies are at their proper level and it’s serious business. A scan of Econ Lit (published by the American Economic Association) shows more than a dozen academic studies have delved into the topic over recent years. So what does it all mean? Looking at the interactive link provided by The Economist, a Big Mac cost US $5.74 through June 2019 compared to 21.00 yuan in China. 21/5.74 = 3.66 is the implied exchange rate between the dollar and yuan if there was parity — a far cry from the actual exchange rate of 6.88 at the time. This suggests the yuan was significantly undervalued compared to the dollar in June and this undervaluation has only increased following the Chinese government’s most recent currency actions. Be sure to read more here: #Burgernomics #CurrencyWars #Yuan

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Michael D. Herley