Big Mac Index is a universal tool for assessing the correlation of currencies and purchasing power of people.
In addition to the obviously influential indices that determine the level of the financial economy (for example, Dow Jones), there are externally comical ones. However, they also play an important role in understanding what is happening. One of them is the Big Mac Index. He determines the ratio of the exchange rate through the prism of the cost of the food basket, in this case, a burger from the popular fast food chain Mc’Donalds. According to the latest indicators of the index, the ruble is the most undervalued currency.
What is Big Mac Index, why exactly the burger and what the indicator shows?
Every year the financial publication The Economist publishes the Big Mac Index. For the first time it was a comic action, but then the indicator’s solidity became obvious.
It demonstrates whether the fair value of a single currency is fair. Well-known dish as an example is not just. First, Mc’Donalds restaurants are practically in the whole world. As of 2019, the network is not represented in just 9 countries.
Second, the components of a burger (bread, meat, cheese and vegetables) are universal in their need for the life of an ordinary person. It also includes the cost of renting the building, output, salaries and the price of products, which serves as additional factors for objectivity.
The index is calculated as follows: the price of Big Mac in two countries with different currencies is compared to each other. If we imagine that in Russia for a burger they give 200 rubles, and in the USA – 5 dollars, then when divided, the difference will be 40. Thus, a dollar is 40 times more valuable than a ruble. Of course, these are approximate values, since real data depends on the specific price of the dish.
The current level of Big Mac Index against the ruble
As of mid-January 2019, Big Mac index shows that the revaluation of the dollar has peaked in the last 30 years. Now the burger in the USA costs $ 5.58, in Russia – $ 1.68. By simple math actions, we get the difference of 70%. Exactly so the national currency of the Russian Federation is undervalued against the dollar.
This, in particular, suggests that in Russia food is still cheaper than in America. The cost of other goods and services (wages, rental rate, payment for electricity, gasoline) is difficult to estimate using Big Mac index, since these spheres in each country differ in price. In relation to the Russian Federation, it makes no sense in principle to make such calculations, since the ruble exchange rate is subject to sanctions and depends on the actions of the budget rule, which sterilizes a significant part of foreign exchange earnings for oil and gas in government reserves.
