Big Mac Index Says Yuan Most Undervalued

The Economist magazine’s Big Mac index, a comparison of the price of the McDonald’s Big Mac around the world to whether currencies are over or undervalued, revealed some shocking results.

The Big Mac index uses the price of the burger to estimate the purchasing-power parity (PPP) of different countries. In theory, the price of the burger should cost the same throughout the world relative to each nation’s exchange rate. If they are not on par, the Big Mac index shows how much a currency is over or undervalued.

[Editor's Note: Warren Buffett: I’m Betting Billions On A Falling Dollar]

As of the end of January, the Big Mac index shows that China’s yuan is the most undervalued currency. The yuan is 56 percent below its PPP rate. The findings tend to defend the U.S.’ position, most recently articulated by Treasury secretary Hank Paulson, that China needs to allow its yuan to adjust upward against the dollar.

Story Continues Below

Currently, China’s weak yuan allows it to export cheap goods to the U.S. and other countries in order to finance its record expansion. The U.S. maintains that China’s cheap goods are destroying the manufacturing industry in the U.S. and hurting the nation’s companies.

Other Asian countries also appear to have currencies that are undervalued by 40 percent to 50 percent, including the Hong Kong dollar (52 percent), the Malaysian ringgit (51 percent), the Indonesian rupiah (46 percent), and the Thai baht (45 percent).

The most overvalued currency, according to the Economist, is Iceland’s kronur, which is a whopping 131 percent overvalued. Norway’s kroner is the second most overvalued by 106 percent.

Among the major currencies, the Japanese yen appears to be 28 percent undervalued against the dollar, while the euro is 19 percent overvalued against the dollar.

Editor's note:
Warren Buffett: I’m Betting Billions On A Falling Dollar
Timely Call on Dollar Makes $5,950 in 5 Weeks!
Discover Asia’s Newest Tiger - Click Here Now
5 highest yielding, safest investments for 2007