Supervisor Elham AbolFateh
Editor in Chief Mohamed Wadie

Use Big Mac To Predict Currency Exchange Rate


Tue 17 Sep 2019 | 09:44 PM
Taarek Refaat

According to the latest data from the Big Mac index, the currencies of Egypt and the Gulf countries are 30-56 percent undervalued against the US dollar.

The index, which first appeared in the Economist magazine in 1986, tracks the purchasing power parity (PPP) of countries' currencies and their real value against the dollar through the use of the Big Mac sandwich.

The PPP theory defines the relationship between relative price levels between different countries, on the basis that exchange rates are determined by the value of goods that can be bought by both currencies.

In other words, the index is an unofficial method of measuring the PPP between two currencies, providing market exchange rates of goods costing the same in different countries.

According to the index, the Egyptian pound is undervalued by about 56 percent compared to the US dollar.

The price of the Big Mac sandwich in Egypt is 42 pounds against 5.74 dollars in the United States, which means that the exchange rate is ought to be 7.32 pounds to the dollar against the current rate of 16.61 pounds. (42 : 5.74 = 7.32 against 16.61= 56% percentage change)

In Saudi Arabia, the Saudi riyal is also undervalued by about 40 percent against the US dollar.

The price of the sandwich in the Kingdom is 13 riyals against 5.74 dollars in the United States, assuming that the exchange rate is thought to be 2.26 riyals to the dollar against a real exchange rate of 3.75 riyals.

In the UAE, the dirham is considered undervalued by 30 percent against the dollar.

The price of the sandwich in the UAE is 14.75 dirhams against 5.74 dollars in the United States. The exchange rate is thought to be 2.57 dirhams to the dollar against the current exchange rate of 3.67 dirhams.

In Kuwait, the dinar is undervalued by about 37 percent against the dollar.

Compared to 5.74 dollars in the United States, the price of the sandwich in Kuwait is 1.10 dinars, which means that the real exchange rate of the dinar is supposed to be 0.19  to the dollar against the current exchange rate of 0.30 dinars.

In Bahrain, the dinar is undervalued against the US dollar by about 35 percent.

The price of the sandwich in Bahrain is 1.40 dinars against 5.74 dollars in the United States. The real exchange rate of the Bahraini dinar is presumed to be 0.24 dinars against the dollar compared to the currently pegged exchange rate of 0.38 dinars.

According to data, the cheapest big mac to buy is in Ukraine at 47 Hryvnia or $1.64. This estimates that the currency is 69% undervalued against the US dollar.

Moreover, the second cheapest destination to buy the sandwich is in Egypt at 42 Egyptian pounds from 34.21 in 2018.

The raw index shows that the Hungarian forint is 47.889 % undervalued as the price of the sandwich is 890 ft. against 5.74 dollars in the US.

The implied exchange rate of a dollar to a forint is calculated at 156.79 ft. against the actual 301.28 ft.

The Big Mac Index is calculated by piding the price of a Big Mac in one country, in tits respective local currency, by its price in the US, to arrive at an exchange rate. By comparing the percentage change between the exchange rate to the official foreign exchange rate, the currency's real value can be estimated.

The index was created by Pam Woodall as an illustration of PPP and has been published annually in the Economist. The index is also the start of the term Burgernomics, which relies on a single Burger, which is sold by the McDonald's fast-food chain, instead of a basket of goods.