Our Big Mac index carries an Asian warning

CURRENCY CO-ORDINATION can be a treat for the taste buds. When officials from the world’s biggest economies negotiated the Louvre Accord in 1987 to arrest the dollar’s decline, they did not go hungry. They kept themselves going with a turbot soufflé cardinale and fine wine from the cellar of France’s finance ministry.Japan and America may once again join forces to guide the direction of their currencies. If they need a tasty bite to accompany their deliberations, they could do worse than order a Big Mac. McDonald’s most famous burger provides a stark illustration of the yen’s misalignment. In Japan a Big Mac costs ¥480 on average. Converted into dollars at market exchange rates, that works out at only $3 or so, roughly half the price of the same burger in America ($6.12). That is a telltale sign that the yen is deeply undervalued. According to an economic principle known as purchasing-power parity, a currency’s value should reflect the amount of stuff it can buy. If it takes Harry Potter one galleon to buy a basketful of goods in the wizarding world and $7 to buy the same goods in America, then a galleon has seven times the purchasing power of one greenback. The exchange rate between the two should therefore be about $7 to the galleon. If the actual market rate differs from that, the currencies are misaligned.Any application of this principle runs into practical difficulties. What should be included in the basket? And what ensures the items are truly the same in each country? One answer is the International Comparison Programme, led by the World Bank, which prices hundreds of items, each fastidiously defined to ensure they are comparable across borders. It is one of the world’s largest statistical initiatives.The Economist takes a simpler approach. Since 1986 we have compared the price of one item, the Big Mac, across the globe. To ensure the sameness of the product across countries, we have relied on the zealous commitment to consistency of the McDonald’s Corporation.The latest edition of the Big Mac index shows that Japan is not the only big Asian economy with a cheap currency (see chart). China’s Big Macs cost only $3.66, implying the yuan is 40% undervalued. In India, McDonald’s does not serve beef burgers. But its Maharaja Mac, featuring a double chicken patty fortified with jalapeños and habanero sauce, is only $2.51. That suggests the rupee lacks the burger’s sizzle.The undervaluation of the rupee and the yuan has also worsened over the past year. In India’s case, that is hardly surprising: its currency has been sliding for years. China is more interesting. The yuan has actually strengthened against the dollar in the past year, and especially the past month. But movements in the foreign-exchange markets have been offset by contrary trends in burger prices. A Big Mac in China costs the same now as it did in January 2025, even as America’s Big Mac has risen in price. So the yuan’s burger-buying power has remained steady, while the dollar’s has declined. Although the dollar has fallen, it has not weakened enough to reflect the buck’s diminished bang.America seems mustard-keen on a realignment of the world’s exchange rates. “I used to fight like hell” with China and Japan, Donald Trump said on January 27th, “because they always wanted to… devalue, devalue, devalue.” Now the dollar is falling and America’s president thinks “it’s great”. This kind of rhetoric, which helped deepen the dollar’s decline this week, represents one kind of intervention. America’s signals of support for Japan’s attempt to strengthen the yen have also swayed markets. But it is hard to imagine a return to the grand currency diplomacy of the 1980s, when world leaders would repeatedly conspire to manipulate their exchange rates. The Louvre accord was accompanied by a sumptuous dinner. Today’s ad hoc interventions are more like fast food to go.For more expert analysis of the biggest stories in economics,finance and markets, sign up toMoney Talks, our weekly subscriber-only newsletter.