The Economist's mid-year update to the 2024 Big Mac Index reveals gains for the South African rand against the dollar, though it remains one of the most undervalued currencies globally.
The Big Mac Index, updated biannually in January and July, measures currency valuation through the lens of purchasing power parity (PPP).
This theory posits that in the long run, exchange rates should equalize the prices of an identical basket of goods and services—in this case, a Big Mac burger—across different countries.
The Big Mac is chosen for its global availability and relative price consistency, although the Index is not a precise measure of currency alignment.
Rather, it simplifies exchange-rate theory, making it more accessible. Despite its simplicity, the Big Mac Index has become a widely recognised economic indicator, featured in textbooks and numerous academic studies.
Real value of the rand in 2024
The Index uses two methods to measure currency value: a direct price comparison and an adjusted index considering local GDP data.
In South Africa, a Big Mac costs R51.90 (up from R49.90 in 2023), while in the US, it costs $5.69 (up from $5.36).
The direct price comparison implies an exchange rate of R9.12 to the dollar. With the actual exchange rate at R18.19 (as of July 31), the rand is 49.9% undervalued, making it the fifth most undervalued currency in the analysis.
Adjusted for GDP Per Capita
One limitation of the Big Mac Index is that it doesn't account for varying production costs in different countries, which are typically lower in poorer nations.
To address this, The Economist also provides a GDP-adjusted index.
A Big Mac costs 49.9% less in South Africa ($2.85) than in the United States ($5.69) at market exchange rates.
However, when adjusted for GDP per capita differences, the price should be only 19.4% less ($4.58). This suggests the rand is 37.8% undervalued, with a fair value of approximately R11.31 to the dollar.
While the South African rand has made gains against the dollar this year, it continues to be one of the world's most undervalued currencies.
The Big Mac Index, both in raw and adjusted forms, highlights the disparities and provides insight into the rand's real value amidst global economic fluctuations.
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