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Big Mac index shows the countries where Aussie dollar will go furthest

Lucy Dean
Pictured: The McDonald's Big Mac, now used as an economic indicator by The Economist. Image: Getty
The humble Big Mac is being used as an economic indicator. Image: Getty

Australians looking for a holiday should travel to Britain, China and Japan if they want their money to go furthest, the latest Big Mac index reveals.

The latest index from bi-annual tool, released by The Economist, found the AUD is 26 per cent undervalued against the US dollar and 7 per cent undervalued against the Euro. That’s based on a Big Mac costing AU$6.15 in Australia and US$5.74 in the United States.

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This implies an exchange rate of 1.07. That means that when measuring the difference between this and the actual exchange rate, 1.44, the Australian dollar is 25.8 per cent undervalued

However, it’s 4 per cent overvalued against the British pound, 40 per cent overvalued against the Chinese yuan and 19 per cent overvalued against the Japanese yen.

The index compares the price of Big Mac’s around the world to find what the correct level for currency should be.

“The Big Mac index takes the simplified assumption that a Big Mac should cost the same everywhere,” The Economist’s data journalist, Kushal Kansagra told Yahoo Finance.

|So if a Big Mac is cheaper in country A than country B we say that country A's currency is undervalued. If a Big Mac is more expensive, it is overvalued.”

Continuing, he explained that if one assumes the Big Mac can be used to measure prices and value, travelling Aussies will “feel the pinch less” in countries with lower-valued countries, rather than in those with currencies which are stronger.

And he added, the AUD being undervalued against the USD is good for Australian exports.

“[However] it means that American goods are more expensive for Australian consumers.”

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