VietNamNet Bridge – The Vietnam dong is believed to be undervalued by 39 percent if compared with the US dollar.

Vietnamese await McDonald’s official presence in Vietnam not only because they want to taste its hamburger, but also because they want to know if the Vietnam dong is undervalued or overvalued in the eyes of The Economist.

The Economist will the basis dong on the Big Mac, an index which compares the values of the currencies of the countries of the world where McDonald’s makes its presence.

The Big Mac hamburger is the only item in the basket of goods for The Economist to make the comparison.

A Big Mac hamburger in Vietnam is sold at VND60,000, or $2.84 with the current exchange rate. Meanwhile, a similar hamburger is priced at $4.62 in the US.

As such, if referring to the purchasing power parity (PPP) theory, the Vietnam dong is undervalued by 39 percent if compared with the US dollar.

The same conclusion has also been made when comparing the Vietnam dong with Japan yen, UK’s pound and the euro.

Meanwhile, dong is believed to be overvalued by 4 percent if compared with Chinese yuan.

The figures seem to be logical if reviewing the trade between Vietnam and the countries in 2013.

The dong undervaluing helped Vietnam get the trade surplus in the two-way trade with the US, UK and Japan. Meanwhile, the overvalued dong in comparison with Chinese yuan could be one of the reasons behind the big excess of imports over exports in the trade with China.

In 2013, the trade deficit with China made a new record, reaching $23.76 billion.

However, Big Mac Index, as warned by The Economist, is just for reference for fun. In fact, the factors that make the production cost of Big Mac do not reflect the original values.

The import materials that make the hamburger all bear import tax, while the tax rates are different in different countries. The expenses on retail premises, labor force and transport also vary, thus creating different production costs in different markets.

The Big Mac hamburger in Vietnam mostly uses import materials, from the Australian beef, US potatoes and Malaysian bread.

The contents of the Big Mac hamburgers are also different in different markets to fit the taste of local consumers. In India, for example, Big Mac is made of chicken instead of beef.

Meanwhile, economists, who analyzed the dong value based on a large group of goods items, have come to a conclusion that the dong has been overvalued, especially against the greenback, the currency to which the dong is bound.

The research work of Vu Quoc Huy, Nguyen Thu Hang and Nguyen Hai Dang to the order by the National Assembly’s Economics Committee has pointed out that the dong is more expensive than its real value, thus weakening the competitiveness of Vietnamese exports.

Regarding the dong/dollar exchange rate policy, Governor of the State Bank Nguyen Van Binh said in 2014, the exchange rate would be managed in a more flexible way to help boost export, but the devaluation rate would not be higher than 2 percent.

In 2013, the dong was devaluated by one percent.

NCDT