Even though a MacDonald’s Big Mac burger now costs $1,91 in South Africa, that is still almost 30% below what a Big Mac costs in America, namely $2,71.
For the Big Mac to cost the same in both countries would imply an exchange rate of R5,15 per dollar.
The April 25 price at an exchange rate of R7,30 per dollar for a R13,95 rand Big Mac in dollar terms is 20% more expensive than the $1,59 price on January 17 this year and more than double the record low of only 72 US cents touched on December 20, 2001. On that day the rand reached a record worst level of R13,86 per dollar.
The Economist magazine’s Big Mac index is based on the theory of “purchasing-power parity” (PPP).
Under PPP, exchange rates should adjust to equalise the price of a common basket of goods and services across countries.
The Economist chose the MacDonald’s Big Mac burger as an easily recognisable basket with which to make cross-country comparisons.
In South Africa a Big Mac now costs R13,95 compared with R9,95 in December 2001 and only R9 in January 2000 when the rand averaged R6,12 per dollar for the month.
In December 2001, South Africa was the cheapest country amongst the 43 countries surveyed. China has now taken up this position as a Big Mac there costs $1,20 using the exchange rates prevailing on April 22.
Argentina, Belarus, Brazil, Egypt, Hong Kong, Georgia, Honduras, Macau, Malaysia, the Philippines, Russia, and Thailand are all cheaper than South Africa.
Iceland is the most expensive country in which to buy a Big Mac as it costs $5,79 there. It is followed by Norway, Switzerland, Sweden, the UK, Denmark, the Eurozone, Costa Rica and Lebanon, who are all more expensive than the US.
Economists warn that forecasting any currency is the most difficult variable to forecast as volatile capital flows overwhelm foreign trade flows.
That is why some economists say PPP in fact stands for “Pretty Poor Predictor”.
The Economist magazine said that based on the Big Mac index, the Australian dollar is likely to see the biggest gain as it is the most under-valued at 31% of the developed countries currencies.
This is good news for the South African rand as it seems set to re- establish its R4,35 per Australian dollar link. – I-Net Bridge