While the Israel Manufacturer’s Association and a coalition of exporters have long complained that Israel’s currency is too strong, they got an unlikely endorsement on Friday from McDonald’s.
More specifically, The Economist released its latest Big Mac Index, a simple, lighthearted and popular indicator of whether currencies are valued correctly.
The idea, according to the newspaper, is this: The price of a Big Mac captures a lot of what’s going on in a given economy, from labor to rent to the price of produce. Since Big Macs are just about the same in most countries, they should, according to the economic theory of purchasing power parity, cost about the same when converted into the same currency.
“Since a Big Mac costs 48 kroner ($7.76) in Norway and only $4.80 in America, the kroner is overvalued by 62 percent according to this lighthearted, protein-rich analysis, making it the most puffed-up currency in the index,” The Economist offered by way of example.
In Israel, the cost of a Big Mac in 2014 is NIS 17.50, which at the NIS 3.41 exchange rate comes out to $5.13.
That figure is 6.9% more expensive than the US Big Mac price of $4.80, meaning that – in the flurry-filled world of the Big Mac economics, at least – the Shekel is about 6.9% too strong.
If Ronald McDonald were the world’s central banker, the shekel would be 3.65 to the dollar (and Israel’s exporters would be thrilled, as their products would suddenly seem much cheaper to customers around the globe).
The Big Mac Index, of course, is just a rough approximation, and not a substitute for a thorough economic analysis.
In testimony to the Knesset Finance Committee earlier in July, Bank of Israel Governor Karnit Flug said: “What is behind the appreciation in Israel? Israel’s economy is in a relatively good situation.”
“We have a continuing current account surplus, and net foreign direct investment by nonresident investors who see Israeli companies as attractive for investment,” Flug said.
In the first half of 2014, the shekel strengthened by about 1.6% against the dollar, but the Bank of Israel’s policy is aimed more toward easing the trend of appreciation than reversing or distorting it.
Even by Big Mac standards, a 6.9% deviation isn’t much. The Economist also has a more “gourmet” version of the Big Mac Index, however, which takes into account the fact that in poorer countries, labor costs are lower.
When it controls for the size of Israel’s economy, it finds that the shekel is overvalued by 26.8%.
Relevant to your professional network? Please share on Linkedin
Think others should know about this? Please share