How it works
READERS AND even some experts are much more familiar with The Economist McDonald’s Burger index than the more sophisticated REER. The magazine takes the prices of a standard hamburger – its Big Mac – in all the countries where it’s available and converts it into US dollars by using the current free market exchange rate. According to The
Economist, the Big Mac currently costs US$2,44 in South Africa versus $3,58 in the US and $4,62 in Europe. That suggests SA’s importers have nothing to complain about: the rand is still undervalued.
For the calculation of the real effective exchange rate, something similar is done but a bit more sophisticated. SA’s trade and services account with the rest of the world is carefully analysed, a weight is worked out for every currency and a base year fixed. Then it’s assumed a currency constantly devalues – or re-values – by the difference between its own inflation rate and the weighted inflation rate of its trading partners. The calculations are made by the SA Reserve Bank. If everyone works out properly, the REER will always stay 100.
Fluctuations over or under 100 then tell local businessmen whether our currency is over-or undervalued. Exactly a year ago, at the time of the latest small bull market (if it was one), the REER stood at 90. The rand was well undervalued. Now the REER is at 114. Forget about the Big Mac: everyone in SA who produces something for export knows he’s currently receiving less. The table shows all five of the leading currencies used for the calculation of SA’s REER weakened sharply against the rand over the past year.