2/3/24, 7:50 PM What Donald Trump can learn from the Big Mac index

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Finance and economics | Burger prices

What Donald Trump can learn from

the Big Mac index
Should the presidential candidate go on another crusade against the yuan?

image: rex shutterstock

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2/3/24, 7:50 PM What Donald Trump can learn from the Big Mac index

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L ittle is more symbolic of globalisation than a McDonald’s hamburger.

The American fast-food chain opened its first Chinese branch in 1990. The
outlet was in Shenzhen, a small town just across the border from Hong Kong,
which was home to the country’s original “Special Economic Zone”—an area
where the Chinese government could try market liberalisation before rolling it
out to the rest of the country. The Big Mac was a little piece of American
capitalism in a communist country.
We started publishing our Big Mac Index—a tongue-in-cheek way to value
currencies—a few years earlier, in 1986. Our latest update shows that the
Chinese yuan is the most undervalued it has been against the dollar since
shortly after the global financial crisis of 2007-09. Back then American
politicians argued that China’s leaders were deliberately undervaluing their
currency in order to get an unfair advantage, and boost exports. Do they have
reason to be suspicious this time around?

The index demonstrates the concept

of purchasing power parity (ppp),
which maintains that the real value
of a currency is the amount of goods
and services that you can buy with
it, rather than the number on a
trader’s terminal. Over a long
enough time frame, however, the
two values should converge: the
relative cost of buying the same
bundle of goods and services in two
different countries should roughly
equal the nominal exchange rate.
Oh i
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2/3/24, 7:50 PM What Donald Trump can learn from the Big Mac index
Otherwise savvy traders could
consistently make a risk-free profit
by selling goods across borders.
Admittedly, the theory works better
for some products than others.
Shipping a burger from Shenzen to
Seattle might be inadvisable.
image: the economist

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Yet ppp conversion factors, which aim to show the gap in relative prices
between two countries, and are produced by international bodies such as the
World Bank, have to contend with something difficult. People buy different
goods in different countries. Chinese branches of McDonald’s sell things such
as boba tea and congee, for instance, and these delicacies are unavailable to
American consumers. Fortunately, though, the Big Mac is a standardised
product. Consumers in China enjoy the same meat patties as those in America.
Comparing the price of the burger in different countries with their exchange
rates gives a rough idea of whether their currencies are undervalued or
overvalued.
A Chinese Big Mac cost 25 yuan in December 2023, whereas the American
version came to $5.69. Divide one by the other and the Big Mac index gives a
dollar-to-yuan exchange rate of 4.39. That compares with a nominal exchange
rate of 7.20 yuan per dollar. It therefore suggests that the yuan is undervalued
by 39%.
Perhaps the Big Mac index will provoke Donald Trump. During his successful
presidential campaign, Mr Trump promised to label China a “currency
manipulator” on his first day in office. At the time, the country’s currency was
37% undervalued according to our burger index. America did belatedly label
China a currency manipulator in 2019, despite Chinese leaders intervening to
support the yuan, only to then reverse the decision in 2020.
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2/3/24, 7:50 PM What Donald Trump can learn from the Big Mac index

Mr Trump would be well-advised to hold off this time, however, for the
undervaluation of the yuan is not unusual. Although the dollar has weakened
against the currencies of some richer economies, such as Britain and Canada, it
has strengthened against all but a few poorer ones. Moreover, low inflation in
Asia, compared with America and Europe, has led to relatively cheaper Big
Macs: Japan, South Korea and Taiwan have also seen their currencies become
more undervalued. If the appearance of burgers indicates the arrival of
globalisation, their staying power (and good value) is testament to American
capitalism’s continued success. ■
Correction (January 27th 2024): An earlier version of the chart mistakenly
suggested that a Big Mac cost $5.90 in the Euro area, rather than $5.87. We also
wrongly stated that the price of a Big Mac in China had fallen. Sorry.
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This article appeared in the Finance & economics section of the print edition under the headline "Milkshake and lies"

Finance & economics

January 27th 2024
→ Wall Street titans are betting big on insurers. What could go wrong?

→ As China’s markets suffer, what alternatives do investors have?

→ Investors may be getting the Federal Reserve wrong, again

→ What Donald Trump can learn from the Big Mac index

→ Why sweet treats are increasingly expensive

→ How American states squeeze athletes (and remote workers)

→ The false promise of friendshoring

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