The Economist [disclosure: Speed client] today publishes the 25th annual edition of the Big Mac index. Since its launch in 1986, this light-hearted guide to whether currencies are at their “correct” level has made some startling predictions.
This year’s Big Mac index is no exception with warnings about the widely perceived undervaluation of the Chinese yuan as well as warnings about the overvaluation of the Brazilian and Argentinian currencies. In its 25-year history, the burgernomics behind the Big Mac index has been praised, criticised, analysed as the subject of at least 20 academic studies, and widely quoted by politicians and pundits around the world.
It has also provided a few hot tips for investors. When the euro was launched in 1999, the widespread prediction was that it would immediately rise against the dollar. The Big Mac index disagreed, showing that the euro was already significantly overvalued. Soros Fund Management later admitted to The Economist that it studied the Big Mac index’s prediction but decided to ignore it and regretted the decision when the euro promptly fell.
Image source: The Economist online
This year’s main burgernomics prediction is that the yuan is not as undervalued as American politicians state. The raw data from the Big Mac index implies that the yuan is 44% undervalued compared to the US dollar. However, burgers should be cheap in emerging economies where wages are low. When the relationship between prices and GDP per person is taken into account, The Economist calculates that the yuan is now close to its fair value against the dollar.
To celebrate the 25 years of burgernomics, readers of The Economist are also being challenged to devise a new light-hearted international economic barometer. The invitation to devise a new international barometer is open to all readers.
Suggestions for other quirky indices to rival the crane Index (the number of cranes you can see from a given point in a city), the lipstick index (when things get tough, women buy lipsticks instead of dresses) and The Economist’s own “R-word” index (tracking the early signs of an impending recession by counting newspaper stories which mention the R word) should be sent to email@example.com.