How many yuan is a Big Mac?

The Big Mac Index: Is the Yuan Undervalued?

The Economist’s “Big Mac Index,” a quirky but surprisingly useful tool for gauging currency valuations, suggests that the Chinese yuan might be significantly undervalued against the US dollar. This index, based on the simple premise that identical goods should cost roughly the same in different countries after exchange rate adjustments, uses the price of a Big Mac – a globally standardized product – as its benchmark.

In July 2023, the numbers told an interesting story. A Big Mac in China cost 24.40 yuan. When converted to US dollars at the prevailing exchange rate, this came out to approximately $3.38. Meanwhile, in the United States, the same Big Mac rang up at $5.71.

The stark difference in price, a difference of $2.33, is what raises eyebrows. According to the Big Mac Index methodology, this discrepancy implies that the yuan is undervalued. If the yuan were fairly valued against the dollar, the cost of a Big Mac in China, when converted, should be much closer to the US price.

Based on this hamburger comparison, the yuan appears to be nearly 41% below its expected value. This doesn’t mean that the actual exchange rate should instantly jump to reflect this valuation. The Big Mac Index is, after all, a simplified model that doesn’t account for all the complexities of international finance, such as import tariffs, local taxes, labor costs, and transportation expenses.

However, the index does provide a useful, accessible point of comparison. It highlights the potential for imbalances in purchasing power parity between the two economies. While not a definitive predictor of future exchange rate movements, the Big Mac Index serves as a readily understandable indicator for economists and the public alike, suggesting that the yuan’s current valuation might not fully reflect its true economic worth.

The implications of an undervalued yuan are far-reaching. It can give Chinese exporters a competitive edge by making their goods cheaper for foreign buyers. However, it can also lead to trade imbalances and potential tensions with trading partners who feel unfairly disadvantaged.

Ultimately, while the Big Mac Index shouldn’t be taken as gospel, its latest findings provide a compelling, albeit simplified, glimpse into the possible underestimation of the yuan’s true value. It’s a food for thought, wrapped in sesame seed buns, that continues to spark discussion about global currency valuations.