MercoPress. South Atlantic News Agency

Brazil’s currency the most overvalued: anywhere from 52% to 149% vis-à-vis the US dollar

The Big Mac can be full of surprises

The Brazilian Real is the world's most expensive currency and is 149% overvalued against the dollar and the Colombian peso, the next most expensive currency is 108% above the US currency, according to British magazine The Economist, which has created a new version of the Big Mac index.

The new and improved index takes into consideration not only the price of the hamburger but also the Gross Domestic Product (GDP) per capita of each country analyzed.

The new methodology also shows that China's currency, the Yuan, is not as undervalued as most people believe. The Economist says the Yuan seems to be close to its fair value against the greenback and is even slightly overvalued by 3%.

Using the old method, which compares only the price of the Big Mac, the Brazilian currency is 52% above its fair value. In Brazil, the Big Mac costs the equivalent of 6.16 dollars while in the US the price is 4.07 dollars.

Using the old Economist's methodology, the Chinese currency is 44% below its fair value against the dollar. The average price of the Chinese Big Mac is 2.27 dollars.

The British magazine's Big Mac index, which is 25 this year, is based on the theory of purchasing power parity. This notion points to the relationship between two currencies based on the amount of each currency that is needed to purchase a particular set of products - in this case the Big Mac hamburger at McDonald's - in each country.

Brazil and Argentina are undergoing a similar situation as US excess liquidity floods world markets with dollars that force the appreciation of local currencies, a phenomenon Brazil officially identifies as the “currencies war.”

The Argentine Peso overvalued in 18.9%. The price of a Big Mac is 4.84 dollars in Argentina which means the exchange rate should be established at 4.92 Argentine pesos to the dollar, when it really stands at 4.13 pesos.

Nevertheless Argentina is not an entirely transparent case since the Big Mac has a ‘reference’ price agreed with the government to help with the inflation and consumer prices indexes. Argentines complain that the ‘ref’ Big Mac does not even taste as a real Big Mac!

But if GDP per capita is taken into account, the exchange rate imbalance is even greater. This is because in emerging countries the Big Mac should be cheaper since labour overall is less qualified and should have a per unit cost lower than in industrialized countries.

This means that the difference in exchange rate for Brazil soars to 149% and in Argentina to 101%.

But in some Latin American countries the opposite is also true with some currencies under-valued according to GDP per capita PPP. This would be the cases of countries as Mexico (-32%); Peru (-10.3%) and Chile (-1.7%).