Lit’s more symbolizes globalization than a McDonald’s hamburger. The American fast food chain opened its first Chinese branch in 1990. The facility was located in Shenzhen, a small town just across the border from Hong Kong that was home to the country’s original ‘Special Economic Zone’ – an area where the Chinese government could attempt market liberalization before spreading to the rest of the country rolled out. The Big Mac was a small piece of American capitalism in a communist country.
We started publishing our Big Mac Index a few years earlier, in 1986 – a tongue-in-cheek way of valuing currencies. Our latest update shows that the Chinese yuan is the most undervalued against the dollar since shortly after the global crisis. financial crisis of 2007-2009. At the time, US politicians argued that China’s leaders were deliberately undervaluing their currency to gain an unfair advantage and boost exports. Do they have reason to be suspicious this time?
The index demonstrates the concept of purchasing power parity (PPP), which states that the true value of a currency is the amount of goods and services it can buy, not the amount on a merchant’s terminal. However, over a sufficiently long period of time the two values should converge: the relative cost of buying the same bundle of goods and services in two different countries should be approximately equal to the nominal exchange rate. Otherwise, smart traders could consistently make a risk-free profit by selling goods across borders. Granted, the theory works better for some products than others. Sending a burger from Shenzen to Seattle may not be recommended.
Yet PPP conversion factors, which aim to reflect the difference in relative prices between two countries, and which are produced by international bodies such as the World Bank, face something difficult. People buy different goods in different countries. For example, Chinese branches of McDonald’s sell things like boba tea and congee, and these delicacies are not available to American consumers. Fortunately, the Big Mac is a standardized product. Consumers in China enjoy the same meat patties as those in America. Comparing the price of citizens in different countries with their exchange rates gives a rough idea of whether their currencies are undervalued or overvalued.
A Chinese Big Mac cost 25 yuan in December 2023, while the US version cost $5.69. Divide one by the other and the Big Mac index gives a dollar-to-yuan exchange rate of 4.39. That compares to a nominal exchange rate of 7.20 yuan per dollar. It therefore suggests that the yuan is 39% undervalued.
Maybe the Big Mac index will provoke Donald Trump. During his successful presidential campaign, Trump promised on his first day in office to call China a “currency manipulator.” According to our citizen index, the country’s currency was 37% undervalued at the time. America belatedly labeled China a currency manipulator in 2019, even as Chinese leaders intervened to support the yuan, only to reverse the decision in 2020.
However, Trump would do well to postpone it this time, because the undervaluation of the yuan is not unusual. While the dollar has weakened against the currencies of some richer economies, such as Britain and Canada, it has strengthened against all but a few poorer countries. Moreover, low inflation in Asia, compared to America and Europe, has led to relatively cheaper Big Macs: Japan, South Korea and Taiwan have also seen their currencies become more undervalued. If the appearance of citizens signals the coming of globalization, their staying power (and their good value) is a testament to the continued success of American capitalism. ■
Correction (January 27, 2024): An earlier version of the chart incorrectly suggested that a Big Mac cost $5.90 in the Eurozone, instead of $5.87. We also incorrectly stated that the price of a Big Mac in China had fallen. Sorry.
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