Here’s another table I don’t know what to make of: The Economist’s Big Mac index
Based on the theory of purchasing-power parity, under which exchange rates should adjust to equalise the cost of a basket of goods and services, wherever it is bought around the world.
In the present case, the "basket" is — literally — the Big Mac.
The cheapest burger in our chart is in China, where it costs $1.30, compared with an average American price of $3.15. The Economist claims this implies that the yuan is 59% undervalued.
If that’s the case, then any subsequent de-pegging of the Yuan to the Dollar could have devastating consequences for the greenback.
I do not trade currencies, but I find this to be a real head scratcher.
Hi, the humble burger may help us understand why China will never drop the peg overnight. Personally, I see a gradual liberalisation over time.
That said, PPP fair-value overshoots and undershoots can persist for many years, even in free-floating regimes. For example, in my lifetime Sweden and Switzerland have always been ‘expensive’ countries to visit … I’m talking not just burgers, but all goods and services. PPP may have some long-term gravitational pull on exchange rates but it is not something I would ever bet on.
In the meanwhile, it looks like the Far East is the best place to go for a Happy Meal.
As a side note, I see that Dubai is not listed in the chart. Dubai also pegs its currency to the USD and from experience the currency is also too cheap. This is also true in Macdonald Big Mac terms. I see inflation picking up strongly in Dubai, as a result of domestic factors and the artificially weak exchange rate. Hotel and food prices are already picking up. If the USD structural decline takes hold again, I wonder if Dubai will revalue?
You have to adjust not just for currency, but local sales taxes, regulatory costs of doing business, etc. For example, Germany has a sales tax for food, higher utility & waste disposal fees, higher fuel taxes, stricter labor and benefits standards, etc. Also the burger has a different “social status” in Europe, at least not to long ago having been a symbol of the US way of life & coolness.
Products of the local economy are hence much different from internationally traded commodities.
Nevertheless,interesting data point.
The St. Louis Fed within the last three years or so did an analysis of the Big Mac index and found it to be spot-on in relation to much more complicated purchasing power parity calculations.
This purchasing power parity reasoning is misleading. How many macs can you eat everyday? When you income reaches certain level, food expendisture only account for a small fraction of your consumption basket. When a Chinese wants to buy a Ford car, he has to pay the same amount of money as an American does. There is manipuatlion of exchange rates.
I notice that by this measure the yen is about 30% undervalued — just about where I’d place it based on what I know of relative wages and working hours in engineering and software development positions. That’s why it always irks me so much to read about how much better Japanese automakers are than GM and Ford. When your government gives you a 30% price advantage by exchange rate manipulation, it’s not difficult to clean your competitors’ clocks.
In the five quarters from Q1 2003 to Q2 2004, the Japanese government openly expended about $320 billion to keep the yen down, and authorized expenditure of about $1 trillion more (a good way to keep anyone from getting ideas about imitating Soros’ coup against the British pound). It’s fascinating that there was so little comment on this by US economists — especially conservatives — if the US government had expended $640 billion and authorized $2 trillion more to manipulate the dollar exchange rate to promote US exports, would they not have been screaming bloody murder?
It’s also fascinating that the yen hasn’t risen much since Q2 2004 despite there having been little open intervention by Japan’s government since that time. This leads me to believe that they have found indirect means to accomplish the same goals. For example, since a significant fraction of China’s current account surplus is said to be due to “hot money” inflows, might a large part of it be coming from Japan? And might Japanese support of the “yen carry trade” by zero interest rate policies be another method of “stealth intervention”?
[When your government gives you a 30% price advantage by exchange rate manipulation, it’s not difficult to clean your competitors’ clocks.]
Oh give over. Japanese car manufacturers cleaned global clocks at 80 yen to the dollar. 1983 called, they want their theory back.
In related news, I think this year marks the fifth anniversary of my writing a letter to the Economist pointing out that the Big Mac is *not* an internationally standardised commodity. It differs in fat content, calorific value and even weight between countries, to suit local tastes and depending on the local beef available. They’ve never printed a single one of them.
On a side note, on ABC World News Now report on the increase in bankruptcies.
New York bankruptcy judge Nempho says that since McDonalds began accepting credit cards the average check has gone from $5 to $7.
Factor that in to your $3.15.
Is it just me, or is the Economist becoming increasingly pathetic and irrelevant? Back in the 90s, I turned to the Economist for non-partisan, economically conservative, socially liberal, news from around the world. I just don’t find them particularly credible or relevant in an age where the truth is an elusive commodity. They get most of the facts right, but the editorial perspective now serves to obscure the obvious conclusions…
Anyone who ate hamburgers in China and in the US knows that there are NOT the same thing. Chinese burger is miniature, sweet, comes in a small carton. It is served by ugly petite girls, speaking in a high voice, impossible to date. American burger is big, meaty, comes in colorful wax paper and a box. The girls are healthy, big bottoms and alert for a date. How could anybody compare them?
Anyone who ate hamburgers in China and in the US knows that there are NOT the same thing. Chinese burger is miniature, sweet, comes in a small carton. It is served by ugly petite girls, speaking in a high voice, impossible to date. American burger is big, meaty, comes in colorful wax paper and a box. The girls are healthy, big bottoms and alert for a date. How could anybody compare them?
Back in 1999 when our exchange rate with NZ was more favorable… I remember purchasing 2 combo meals for about the same price as you could get 1 back in the states. The airfare to NZ ended up being more expensive than my 5 week stay.
Something more. In China, our guide told us it was the safest food in Beijing, nothwithstanding the cockroaches and rats pullulating in the neighborhood. I would rather pay 3 U$S more and eat a Swiss completely tasteless but impeccably sterile burger.
[Is it just me, or is the Economist becoming increasingly pathetic and irrelevant?]
Only in the US coverage (this is according to friends who still read it; I gave up the US coverage a few years ago). The non-US and business coverage which I still read is actually getting better and is pretty good these days.
People seem to forget that the “Big Mac Index” is the Economists’ tongue-in-cheek “analysis” of exchange rates. I have used it over the years as a general indicator of whether a currency is “overvalued” or “undervalued”. I believe it works well over the long term, and it seems to work better for comparison of the major currencies (e.g. USD vs Euro or Yen, etc.)
People who take this too seriously either need to get a sense of humor or get a life (or both)…
[The non-US and business coverage which I still read is actually getting better and is pretty good these days.]
That makes sense. I’ll try skipping the U.S. coverage…
I would simply say that the price of a Big Mac simply reflects the locally valued price of the human making the burger. In China, where there is no regard for a human worker, the burger is cheap. In Switzerland, where there is high regard for individuals, the burger is expensive. You have to pay the chef in Switzerland, and you don’t pay for the cook in China, because if he dies, there are a billion more to replace him.
healthy? colourful boxes? speaking about the same country?
secrest
OUT