Thursday, August 2, 2012

Big Mac

I don'r eat Big Macs since I don't like the "Special Sauce."  In one of my newsletters (email type) I ran across the Big Mac index!

For the 26th year running, The Economist magazine has just published its famed Big Mac Index -- a tongue-and-cheek way of measuring purchasing power parity (PPP) -- that is, the relative over and undervaluation of the world's currencies.
According to the theory of purchasing power parity, a dollar should buy the same amount of the same good across all countries. As a result, in the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country.
By comparing the cost of Big Macs -- a fast-food hamburger sold in about 120 
countries -- the Big Mac Index calculates the exchange rate (the Big Mac PPP) that would result in hamburgers costing the same in the United States as they do abroad. Compare the Big Mac PPP to the market exchange rates, and voilà!... you see which currencies are under or overvalued.
For an indicator that was as much a product of English humor as it was serious economic design, it's surprising how seriously some academics and governments now take the Big Mac Index. In Argentina, the Secretary of Commerce actually regulates the price of Big Macs -- just so Argentina looks better in the annual index. But the Big Mac Index also provides a snapshot of U.S. inflation versus official government statistics. The price of a Big Mac in the United States today is 16% higher than it was in 2010. Yet the official increase in the Consumer Price Index (CPI) was a fraction of that.    ....
As a group, the Scandinavian currencies have always been the most overvalued currencies in the world. A Big Mac in Oslo, Norway, last year cost you twice as much as in the United States. Today, it's only 63% more expensive. Four years ago, the euro was overvalued by a massive 50%, compared to the U.S. dollar. Today, the euro is trading right at PPP. Last July, the Swiss franc was overvalued against the U.S. dollar by 98%. Today, the Swiss franc is only about 50% overvalued against the dollar.
Moving to Asia, you'll find that the Chinese yuan remains 42% below its PPP rate. A Big Mac costs $2.45 in China at current exchange rates versus $4.33 at your local mall in Ohio. This seems to confirm that China's cheap currency acts as a massive subsidy to Chinese exports. And despite threats of being labeled a currency manipulator, recent actions of the Chinese government suggest that it will be pushing down the exchange rate even further, as a way to make Chinese exports more competitive abroad.
As a result of collapsing commodities prices, commodities-based currencies in Australia and Canada have been pummeled. The Australian and Canadian dollars went from being 20% overvalued last year to 8% overvalued and 10% undervalued, respectively. The most surprising drop may have come from Brazil. Last year, the Brazilian real was 52% overvalued on the Mac Index. Today, it is overvalued by just 17%.(from  The Global Guru newsletter)

I found this intersting.  Big Macs are a universal commodity!

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