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Is China manipulating its currency? The Big Mac Index says yes

On Thursday, the Economist came out with 2015’s Big Mac Index.

What, you ask, is the Big Mac Index? It’s just what it says — an annual index of McDonald’s Big Mac, priced in different currencies.

The Economist began the Big Mac Index back in 1986 as a light-hearted measurement of “whether currencies are at their ‘correct’ level.” It stuck.

The Big Mac Index is based on the economic concept of purchasing power parity, which tries to adjust prices in different countries to account for differences in exchange rates. To oversimplify, if the dollar is worth about 6 Chinese yuan, which it is at the moment, an identical item in China should cost roughly six times as many yuan as dollars in America. And since a Big Mac is sort of identical anywhere in the world, argues The Economist, its price ought to reflect the exchange rate of the currency in which it’s being sold and little else.

Back in 2004, NewsHour economics correspondent Paul Solman did a story on the falling dollar and sat down with The Economist’s Tom Easton to understand why the Big Mac was a reliable metric.

Now look at the chart and notice this year’s results. A Big Mac in China in July of 2015, priced in dollars at the current dollar-yuan exchange rate: $2.74. The average price in America this month? $4.79. They ought to be nearly the same. In fact, the Chinese Big Mac is selling at 43 percent less than its American progenitor. To The Economist, this is compelling evidence for what critics of Chinese economic policy have long argued: that the Chinese have manipulated the yuan, keeping it artificially low in order to increase their exporting capabilities. Or, as the magazine puts it: “the ‘raw’ Big Mac index says that the yuan [is] undervalued by 43%.”

And what about the euro, which has been falling fast since the Greek crisis re-erupted a few months ago? According to the Index, because Big Macs are also now less expensive in Europe than America, exchange-rate adjusted, the U.S. dollar is overvalued by almost 20 percent against Europe’s common currency. And what country boasted the cheapest Big Mac in the world? Venezuela, at a mere 67 cents. That suggests that although Hugo Chavez’ former fiefdom has been plagued by volatile politics and plummeting oil prices, its currency may be something of a bargain these days. Switzerland, on the other hand, continues to have the world’s most expensive Big Mac. Visit a McDonald’s there, and you’re ponying up $6.82 for your 495 calories.

Now Burgernomics (and yes, that’s the term) has its limitations. For one thing, Big Macs are not identical everywhere. For example, the American Big Mac must be fatter than the Swiss, weighing in at an unhealthy 515 calories, according to MyFitnessPal, the diet app. And purchasing power parity rates are difficult to determine for a number of reasons besides portion size, well summarized here. Still, the Big Mac Index has been a somewhat reliable indicator of currency over- and undervaluation in the past. And it’s fun to look at, regardless.

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