Czech Crown Undervalued by 13%: Big Mac Index Reveals Currency Discrepancy

Since the commencement of the year, the Czech crown has maintained a strong position against major global currencies. However, a peculiar disparity has come to light through an unlikely metric – the pricing of the iconic Big Mac burger. This revelation indicates an ongoing undervaluation of the Czech crown, prompting discussions about economic factors influencing currency exchange rates.

According to the Big Mac Value Index, the Czech crown is estimated to be undervalued by a notable 13% when compared to the US dollar. While the cost of a Big Mac burger stood at $5.58 in the United States by the end of July, the same sandwich demanded 105 Czech crowns in the Czech Republic.

This comparison implies that a more accurate exchange rate should be approximately 18.82 crowns per dollar. However, the real exchange rate as of July was notably weaker, resting at 21.65 crowns per dollar.

The undervaluation trend extends further when considering the euro. In comparison with countries where the euro is the official currency, the Czech currency, known as the króna, is undervalued by almost 17%. The average cost of a Big Mac burger in the eurozone is approximately 5.28 euros.

Taking into account the Czech burger cost of 105 crowns, the ideal exchange rate against the euro should be around 19.89 crowns per euro. Nevertheless, the actual exchange rate at the close of the previous month was 23.87 crowns per euro.

The Big Mac Index, a light-hearted measure introduced by The Economist magazine in 1986, offers a unique perspective on currency purchasing power across nations. The index relies on comparing the prices of the universally available American hamburger, sold by McDonald’s in over 100 countries, as a means of evaluating currency overvaluation or undervaluation against the US dollar.

However, critics highlight that the index has its limitations. One argument asserts that a hamburger’s affordability in developing nations may be attributed to lower labor and operational costs. In response, a modified version of the index was introduced in 2011, incorporating labor costs and per capita GDP. This adjusted view suggests a less pronounced undervaluation of the Czech króna against both the dollar and the euro.

Looking back over the past year, the index reflects a significant shift in the Czech currency’s value against the dollar. The króna, which was once undervalued by 23%, has appreciated by approximately 8% against the US dollar, driven in part by the Czech National Bank’s higher interest rates compared to the US central bank.

Amidst these intriguing currency dynamics, analysts predict potential fluctuations in the value of the Czech krona in the coming months. As economic conditions evolve, the currency’s performance against major global counterparts may witness significant shifts, impacting trade, investments, and overall economic stability.

Article by Prague Forum

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