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The Big Mac Index and US/China Comparisons-July 2020

The relative sizes of the US and Chinese economies vary depending on the method of measurement. One method is The Economist’s “Big Mac Index”. It considers how a given unit of currency can purchase different quantities of a good or service in different countries, even after accounting for the exchange rate. Motivated by this logic, The Economist has compared the price of Big Macs around the world since 1986. The result is a rough gauge of the purchasing power of currencies. It suggests that many currencies are undervalued, relative to the dollar, on the foreign-exchange markets.

Using classical GDP-comparison methods, America produced US$21.4trn-worth of goods and services. Since it took about 6.9 yuan to buy a dollar last year, China’s GDP was worth only $14trn when converted into dollars at market rates. That was still well short of America’s.

However, according to the Big Max index, 6.9 yuan stretches further in China than a dollar goes in America. The McDonald’s Big Mac costs about 21.70 yuan in China and $5.71 in America, according to prices collected by The Economist. If that is the case, then 99trn yuan can buy as much as $26trn, and China’s economy is already considerably bigger than America’s.

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