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With the South African Rand always going up and down, it’s difficult not to feel hopeless when it comes to understanding just how far our local salaries can go.

That’s where the Big Mac Index comes into play.

In 1986, The Economist invented the concept in order to find a way to compare purchasing-power parity (PPP) across the world. Basically, it’s a clever way to see if currencies are at a “correct” level, using a fast food product that can be found in every country.

While the Big Mac Index started as a simple way to explain how exchange rates fluctuate and how they should (optimistically) equalise over time between countries, the concept has blossomed into a “Burgernomics” that has become a global standard of comparison.

With that background in mind, how does that help us understand more about our fickle Rand?

Well, The Economist just updated their official Big Mac Index info for July 2023, and the results are both helpful and concerning.

Looking at the raw data for how much a Big Mac costs in South Africa, which is R49.90, compared to US$5.58, the implication is that our exchange rate to United States currency should be R8.94. However, we all know that this is not the case.

At the time this data was processed, the actual real-time exchange rate between the Rand and the US Dollar was R17.78, a whopping 49.7% above what the Big Mac Index suggests.

That means that our Rand is almost 50% undervalued, and in this analysis it means that we have the 5th most undervalued global currency. Eish, do we get a prize for these results?

The Big Mac Index may be helpful in understanding our currency’s value, but it’s clear from the above comparison that there are many more factors that contribute to exchange rates. Unfortunately for us in SA, that means the more load shedding and economic instability, the more the PPP gap, no matter how much a big mac should cost.

Considering that the South African Rand was only the 11th undervalued currency at the start of the year and now sits in the top ten undervalued currencies, we’re optimistic that things can only go up from here. Or down. Whichever allows us to get some fries with that.

[source:businesstech&theconomist]