Food for thought

In October 2010 the average price of a Big Mac burger in the USA was $3.71, while the cost of the same burger in South Africa averaged R19.99. This implies an exchange rate of 5.39 R/US$. During October 2010 the average exchange rate was 6.90 R/US$ implying the rand in October 2010 was undervalued by approximately 27%.

This week’s theme: International shopping comparisons

3 responses to “Food for thought

  1. eric

    9 years Ago

    Would an exchange rate of 5,39 not imply that the Rand was overvalued, rather than undervalued?

  2. Claire

    9 years Ago

    This fact uses the Big Mac Index which was created by The Economist magazine as an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries.

    The reason the rand is undervalued is because in Oct 2010 if a South African wanted to purchase $1 they would have to fork out R6,90. According to the Big Mac index $1 should only have cost R5,39. South Africans were therfore paying too much for $1 and hence the rand was undervalued (according to the index).

  3. Mike

    9 years Ago

    The BMI is flawed – not taking into account cost of local materials, local labour rates etc which all influence costs of a Big Mac.

    You can’t use the BMI as a judgement call on value of the Rand…

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