Considering the price of the Big Mac in the US (US$ 5.36) and the current exchange rate for the dollar in Brazil, the Brazilian currency is undervalued by 17.2%
The Big Mac Index, published by the British magazine The Economist, indicates that the dollar in Brazil should cost R$ 4.27. The publication compares the prices of the famous McDonald’s sandwich in different countries around the world.
The magazine considered the price of the Big Mac in the United States (US$ 5.36) and the dollar exchange rate in Brazil in December to arrive at the percentage. In Brazil, the sandwich costs, on average, US$ 4.44 (R$ 22.53), according to the index.
In other words, considering the price of the Big Mac in the US and the exchange rate for the dollar in Brazil used in the survey, the Brazilian currency is undervalued by 17.2% against the dollar. The exchange rate for the real would be R$ 4.27 if the percentage was respected.
WHAT IS THE INDEX
The measure was created by the publication in 1986 as a method of evaluating the stability of currencies around the world – based on the theory of purchasing power parity. The US dollar serves as “anchor” for the measurement. The current cost of a Big Mac in the US is $5.36.
At the time, the sandwich was chosen by the restaurant’s wide spread around the world. Therefore, the index –which, in practice, is not an accurate indicator– seeks to identify a relationship between exchange rates and the value of goods that currencies can buy.
For example: if 1 Big Mac costs US$ 5 in the USA and R$ 20 in Brazil, it would mean that the parity between the currencies is 1:4, if the exchange rate and the values of the hamburgers have a perfect relationship and without devaluations.
From the price at which the Big Mac is sold in stores in a given country, it is possible to compare it with the price it should cost according to the index. If the sandwich costs more than it should, the currency is undervalued against the dollar. If it is cheaper, the currency is overvalued.
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