The Economist’s Big Mac Index says the Aussie dollar should be 87.2 US cents

A BIG Mac in Australia costs $5.90, compared with $6.60 in the US. Here’s what the means, according to the global Big Mac Index.

IN AN ideal world, the Australian dollar would be 87.2 US cents.

That’s according to The Economist’s latest Big Mac Index, which compares the prices of the McDonald’s burger around the world to determine what the “correct” level for a currency should be.

“It is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same everywhere. Our basket contains only one item, but it is found in around 120 countries: a Big Mac hamburger,” writes The Economist’s economics editor John O’Sullivan.

“If the local cost of a Big Mac converted into dollars is above $US5.28, the price in America, a currency is dear — if it is below the benchmark, it is cheap. The average cost of a Big Mac in the euro area is €3.95, or $US4.84 at the current exchange rate. That implies the euro is undervalued by 8.4 per cent against the dollar.”

Currently, one Australian dollar is worth 80 US cents, with one US dollar worth $1.25.

“The price of a Big Mac in Australia is $5.90 ($US4.47), meaning it is undervalued by 10.9 per cent (or by 6.4 per cent when adjusted for average GDP), coming ninth on the index and suggesting the exchange rate for the AUD should be around $1.12,” O’Sullivan writes.

“The AUD has made gains since the last index in July 2017, where is was undervalued at 14.6 per cent. Switzerland, Norway and Sweden were the three currencies that were overvalued against the USD.”

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Originally published as The Economist’s Big Mac Index says the Aussie dollar should be 87.2 US cents