How it works

Finweek English Edition - - Cover Story -

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.

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