According to the latest Big Mac Index by The Economist, the Rand is undervalued and should be trading at R5.20 to the dollar. It is undervalued by as much as 62.7%, the Index says.
The Big Mac Index gauges whether currencies are at an appropriate level based on the theory of purchasing power parity (PPP), which suggests that exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services in any two countries in the long run. In this case, that basket of goods is a Big Mac burger.
In the US, the price of a Big Mac is $1.89, compared to R26.32 in South Africa. If the exchange rate were R5.20/$, a Big Mac should cost R9.83 in South Africa.
While the Index makes for interesting reading, it shouldn't be taken as gospel. The Economist itself says: "Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies."
