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Wednesday, May 22, 2024

Lessons Donald Trump can Take Away from the Big Mac Index

When McDonald’s opened its first Chinese branch in 1990, it marked a significant moment of globalisation. The fast-food giant set up shop in Shenzhen, a small town bordering Hong Kong and the original “Special Economic Zone” of China. In this zone, market liberalisation was experimented with before being rolled out to the rest of the country, making the Big Mac a symbol of American capitalism in a communist nation.

A few years earlier, in 1986, we started publishing the Big Mac Index. This lighthearted way to evaluate currencies has provided some interesting insights. Our latest update reveals that the Chinese yuan is the most undervalued it has been against the dollar since the global financial crisis of 2007-09. This raises the question: are the suspicions of American politicians that China deliberately undervalues their currency to boost exports justified this time around?

The Big Mac Index is a demonstration of purchasing power parity (PPP), which measures the real value of a currency based on the goods and services it can buy, rather than just the exchange rate. Over time, these values should converge, ensuring fair trade. However, some challenges exist, such as the fact that people buy different goods in different countries. Fortunately, the Big Mac is a standardized product, making it a reliable basis for comparison.

A Big Mac in China was priced at 23 yuan in December 2023, while in the United States, it was $5.69. This gives us an exchange rate of 4.04, suggesting that the yuan is undervalued by 44%. Interestingly, the price of a Big Mac in China has decreased since our last update in June, reflecting deflation not just in McDonald’s menu but also across the economy.

The Big Mac Index has the potential to provoke a reaction, as seen with Donald Trump’s promise to label China a “currency manipulator.” However, this time, China’s situation is not isolated, with other countries also experiencing currency undervaluation due to low inflation and relative economic strength.

In correcting an earlier version of the chart, it was noted that the cost of a Big Mac in the Euro area was mistakenly presented. This highlights the careful attention to accuracy and the thoroughness of our publication.

Overall, the Big Mac Index continues to be a fascinating look into the world of currencies and trade, providing insights that can impact global economics. For expert analysis of the biggest stories in economics, finance, and markets, we invite you to subscribe to Money Talks, our weekly newsletter.

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