Burgernomics: Undervalued rand should be R9 to the US dollar - Big Mac Index

South Africa’s rand should be even stronger than it is right now, trading closer to R9 to the US dollar, according to the latest Big Mac Index.

Against the actual rate used in the study, this suggests the rand is more than 45% undervalued.

The currency's rally over the last few months has seen it briefly dipping briefly below 16 to the dollar.

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The Economist's Big Mac Index uses a country's price for the classic McDonald's burger to illustrate purchasing power parity (PPP) via what's now called 'burgernomics'.

Stephen Grootes asks how accurate this measure still is when considering what a particular currency can buy in its local context, considering the world's vastly differing economies.

Andre Cilliers, director and currency strategist at TreasuryONE, says the starting point for determining real purchasing power should be a country's minimum wage.

The minimum wage in the US is not calculated at an exchange rate of nine, he points out. It is much higher because at a translated R9, an American would get only around $500, which would not translate to a salary they could live on.

"Right there is why the Big Mac in South Africa is a lot cheaper compared to what it is there - it's because our people earn a lot less than people in the US, so it is costing more to make that Big Mac in the US. Look at real estate, which is much more expensive there, so square meter by square metre, you couldn't rent the same meterage in the US with what you pay in SA."

This scenario contributes incrementally to the cost of making that Big Mac, Cilliers points out, which means that the suggested R9 exchange rate does not reflect the true picture of how products are made and the cost of what is made in the US.

And in South Africa, your buying power in rand terms is only good if you fall into the middle class and above.

"If you're at the bottom end, minimum wage area, there is simply not the money to go to McDonald's and get a burger... So, in the emerging market world like SA, you would find they fit into the same situation because the labour there is a very big factor in the cost in manufacturing."

Scroll up to the audio player to hear more about the relevance of the Big Mac Index