Brazil Travel & Tourism News
RIO DE JANEIRO — The famous Big Mac Index suggests that the Brazilian currency, the real, is overvalued by more than 10% against the dollar. According to an article in The Economist, the real remains overvalued against the dollar, the currency used in the study, despite recent strengthening of the U.S. currency.
Big Mac Index: Brazil’s Real Overvalued 10%
The index compares the price of McDonald’s most famous sandwich in the countries being studied. In Brazil, the burger cost U.S. $4.94 at the time of the survey which The Economist published in this week’s edition. In the United States, whose currency is used as a reference indicating overvaluation or undervaluation of the others, the same sandwich cost $4.33.
The premiss that underlies the index is the theory of purchasing-power parity: according to which, in the long run, exchange rates should self-adjust to equal a commodity or basket of goods and services in different countries.
For example, using what the magazine calls “burgernomics,” with the real now valued at $0.49, the Big Mac costs $4.93. The Brazilian currency would need to fall 12% (to $0.43) for the locally sold sandwich to reach parity in dollars with the same sandwich sold in the U.S. Put another way, to reach parity, the dollar would need to rise 14% to R$2.33.
When comparing Brazil against countries with undervalued currency, the difference is much greater. For the Brazilian Big Mac to reach dollar-parity with the Chinese version (which costs only $2.45), the real would have to fall 51% to $0.24. Conversely, the dollar would have to rise by more than 100% to R$4.17.
Why don’t we just import Big Macs from China? After all, standardization of the product, across almost all the countries of the world, would ensure the quality would be the same–right?. Well, aside from the practical matter, like keeping them warm and tasty during transportation, the cost of production–not just exchange rates–play a role in the cost of the burger.
The “Brazil Cost”
The Big Mac Index can not be used as the sole factor in determining definitively whether a currency is over or under valued. If the sandwich – or any product – is more expensive in one country that in another, the exchange rate is not solely responsible. Other variables, such as taxes, productivity, and miscellaneous costs–such as the infamous “Brazil Cost”–may also make a country more or less competitive.