On the other side of the ledger, meanwhile, it would lower the yuan price of its imports immediately. All else equal, this can increase China’s imports and reduce its trade surplus. But all else is not equal: the stronger yuan would further exacerbate China’s deflation problem and reduce its overall demand. This is precisely the opposite of what rebalancing requires—which is that China absorb more of what the world produces. Equally important, a nominal appreciation unsupported by macroeconomic- policy changes to rebalance the economy is likely to morph quickly into a real depreciation owing to deflationary pressures. Some argue that this would push China to reflate its economy. But if the ultimate goal is for China to pursue better policies, why not simply discuss those directly? Why route the request through the exchange rate? The second drawback is political. Demanding a nominal revaluation as a headline concession is, in practice, extremely unlikely to be accepted. History is not encouraging. Contrary to what is often believed, the success of the Plaza Accord in 1985 relied on the co-operation of Japan and significant macroeconomic adjustments, including to America’s fiscal stance, to support the dollar’s depreciation. Today China may be more receptive to a conversation about strengthening its social safety net, its pension system or its non-traded service sector. When you push for growth-supporting reforms, you have a chance. When you push for an exchange-rate adjustment, you ask for conflict. None of this lets China off the hook. Its surpluses are real, large and a legitimate concern for the rest of the world, including for a European economy that cannot serve as the absorber of last resort. What China needs to do—and what is in its own long-term interest, given its ageing population and an investment model overly reliant on the tradable sector—is to raise the share of household income in GDP, expand social insurance so that families feel able to spend, and stop financing tradable-sector expansion at the expense of consumption. Do those things, and a real appreciation of the yuan will follow. But let’s also be clear that the required adjustment is not only on China’s side. America will also need to tackle its unsustainable fiscal policy, as well
as its persistently low private savings. That, too, cannot be addressed by exchange-rate gimmicks. The G7 and the IMF locate the problem correctly: it lies in the constellation of domestic macroeconomic choices on both sides of the imbalance. A policy package, whereby China pivots to consumption and services-led growth, and America reins in fiscal deficits, is less spectacular than a grand currency bargain. But it has the advantage of being both effective and achievable.■ Gita Gopinath was chief economist of the IMF from 2019 to 2022 and Pierre-Olivier Gourinchas from 2022 to 2026. Hélène Rey is a professor at London Business School. This article was downloaded by zlibrary from https://www.economist.com/by-invitation/2026/07/28/dont-blame-global-imbalances-on- the-undervalued-yuan
Despite 40 years of our Big Mac index, currencies are still mispriced Exchange-rate theory can be a lot to digest. Instead, take three trips to McDonald’s Jul 30th 2026 THE GOD Apollo, his arms wide, beckons five scantily clad muses. The mural, which caused a stir when it first appeared in Basel’s Barfüsserplatz in 1941, is best admired from a McDonald’s housed in a quaint old building on the other side of the tram tracks. It’s a lovely spot in which to enjoy a burger in the sunshine. But the experience will set you back. A Big Mac costs SFr7.30 in Switzerland or more than $9. You can enjoy the same taste for much less if you are prepared to pop over to Taiwan, a mere 9,500km away. A giant statue of Ronald McDonald used to welcome visitors to the chain’s first
outlet in Taipei, the capital city. The prices remain inviting. You can buy a Big Mac for the equivalent of just $2.42. Why does a Big Mac cost so much more in some countries than in others? Many factors could be at play: tariffs, transport costs, lack of competition. In some countries the Big Mac is a familiar comfort food. In others, it is an exotic treat. In Switzerland strict food rules keep farms small and oblige restaurants to declare the source of their meat and fish. (According to the Herkunftsdeklaration in the Basel outlet, the beef in its Big Macs is a Swiss- Austrian mix.) But pricey burgers can also reveal something interesting about currencies. That thought struck Pam Woodall, our former economics editor, soon after she began writing for us 40 years ago. It was, she says, a “bathtub moment”. The Big Mac has been our muse ever since. The value of a currency should reflect its purchasing power, its command over goods and services. That is an old idea, formalised by Gustav Cassel, a Swedish economist, around the time of the first world war. The catastrophe had wreaked havoc on the gold standard, which had largely fixed exchange rates by pegging the value of the main currencies to gold. People were slow to grasp, however, that the “ancient bonds” between currencies had been sundered. “The public, with incredible tenacity, sticks to the idea that a krona is still a krona, and a pound a pound, whatever one may do with the currency in question,” Cassel complained. He insisted instead that the value of the Swedish krona or British pound should depend instead on whatever one may do with it. “Our valuation of a foreign currency,” he wrote, “mainly depends on [its] relative purchasing power.” That power depends on prices. To know whether 1,000 dong, soles or lei is a lot of money or a little, you need to know the price of things in Vietnam, Peru or Romania. Every few years the World Bank leads an effort to collect that kind of information, comparing prices for hundreds of items across the world. The European Union’s own list runs to over 2,000 products. It is a laborious undertaking, one of the biggest statistical initiatives in the world. And doubts remain about whether the goods are truly comparable across countries. Europe’s statisticians once spent half a day arguing about the continent’s many varieties of strawberry jam.
Our approach is simpler. Rather than window shop for thousands of goods, we collect prices on just one: the Big Mac. It is available almost everywhere —in more than 100 countries around the world. It tastes much the same from Basel to Taipei, thanks to the zealous commitment to consistency for which McDonald’s is renowned. It “has the flavour of ‘the perfect universal commodity’”, as Li Lian Ong, a former economist at the IMF, once put it. We define a currency’s purchasing power as the number of Big Macs it can buy. In America, for example, a single Big Mac can be bought for $6.22. In Switzerland, SFr7.30 is required. Since those two amounts reflect the same purchasing power, it seems reasonable to think you could convert one into the other. The hypothetical exchange rate that would do the trick is SFr1.17 for a dollar. According to the theory of purchasing-power parity, this rate represents the fair value of the two currencies. If the world’s foreign- exchange traders adhered to it, the dollar price of the Big Mac would be the same in both countries and the market value of each currency would match its burger-buying power. But that is not what usually happens. Actual exchange rates often differ markedly from their Big Mac parities. If a currency is worth less in the markets than Big Mac prices would warrant, our index deems it undervalued. If it is worth more, we consider it overvalued (see chart 1). The
Swiss franc is a good example. As anyone who has recently visited the country can testify, a single dollar cannot buy 1.17 Swiss francs at any bureau de change. It cannot even buy one. The actual exchange rate is SFr0.81. That suggests the Swiss franc is disconcertingly expensive. We calculate it is overvalued by 45%. The misalignment of Taiwan’s currency is even greater, albeit in the opposite direction. In Taiwan a Big Mac costs NT$78. So NT$78 has the same purchasing power as $6.22: both can buy one burger. The exchange rate that would make these two sums equivalent is NT$12.54 to the dollar. But on the currency markets, a solitary dollar can buy you over 32 New Taiwan dollars. We calculate that the Taiwan dollar is undervalued by more than 60%. Even bigger misvaluations were evident in the first Big Mac index published in 1986. It indicated that France’s currency was overvalued by 73% and Brazil’s was undervalued by an astonishing 87%. That article was “probably…my first memorable piece”, recalls Ms Woodall. It was supposed to be a bit of fun. It was not originally intended as more than a one-off. Instead the index has continued for 40 years. It has become a fixture of economics textbooks, spawned a cottage industry of academic articles (over 50 by 2023) and racked up over 3,000 citations on Google Scholar. Many variants have been tried or suggested: an index comparing the price of a Starbucks latte in different countries, another tracking IKEA’s Billy bookshelves, a third based on Apple iPods, iPads and iPhones. In 1991 the Union Bank of Switzerland used the Big Mac to compare wages around the world, calculating how long it would take the average worker to earn the price of a burger and fries. (Unbeknown to us, Howard Banks had used the Big Mac to compare earnings around the world in Forbes magazine in 1984.) Its fame has reached some unusual spots. Ms Woodall remembers climbing to Everest base camp and finding an index update in a copy of The Economist left behind by another mountaineer. “You can’t get away from it. Even at 5,000 metres.” A colleague proudly presented the index to North Korean functionaries on a rare visit to Pyongyang. The country lacks a McDonald’s, but the North Koreans were nonetheless interested in the index’s verdict on the Chinese yuan.