Big Mac Index Says The Yuan Is Actually Valued Just Right

big mac index mcdonalds

Photo: Economist

That the world has a single workaday product with a more or less identical recipe that you can buy in just about every country is a gift to the science of Economics. The Economist’s Big Mac Index is an ingenious way to understand Purchasing Power Parity. For example, you can bring your $4.07 that you would have spent on a Big Mac to China and buy almost two.  A Big Mac in China costs 14.7 RMB equivalent to $2.27.

14.7 RMB = Big Mac = $4.07, but 14.7 RMB < $4.07

This is one way of illustrating that China is undervaluing the yuan by 44% to keep export prices down. But there is a problem here. 

14.7 RMB is much dearer to your average Chinese worker than $2.27 is to an American worker. Workers at American McDonald’s stores make about $8 per hour, depending on experience.  In China, a worker performing the same tasks for the same company makes 5.80 RMB ($0.73). So cheap Big Macs in China don’t necessarily prove that China is unfairly manipulating their currency. Prices should be lower in countries where labour is cheaper.

This year, the Economist added another dimension to the Big Mac Index, controlling for per capita GDP.  Here, you can see that the Renminbi is hardly undervalued at all.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.