Thursday, January 7, 2010

How much does a Big Mac Cost around the world???

Burgernomics shows the Chinese yuan is still undervalued....

"THE Big Mac index is based on the theory of purchasing-power parity (PPP)—exchange rates should equalise the price of a basket of goods in different countries. The exchange rate that leaves a Big Mac costing the same in dollars everywhere is our fair-value benchmark. So our light-hearted index shows which countries the foreign-exchange market has blessed with a cheap currency, and which has it burdened with a dear one. The most overvalued currency against the dollar is the Norwegian kroner, which is 96% above its PPP rate. In Oslo you can expect to pay around $7 for a Big Mac. At the other end of the scale is the Chinese yuan, which is undervalued by 49%. The euro comes in at 35% over its PPP rate, a little higher than half a year ago."
The Big Mac, or ANY good from China, is inexpensive in terms of dollars because China maintains a fixed exchange rate relative to the dollar that is LESS than it would be if it were exchanged in a flexible market like most currencies.  The Chinese Centarl Bank actively intervenes in the Foreign Exchange Markets to make sure the Yuan stays within a certain value relative to the dollar.  If they see that the Yuan is appreciating at any given time they  buy dollars and sell Yuan to stay with a trading band (currently approx 6.82 Yuan to the Dollar).  The inertia is for the Yuan to appreciate because, (1) we buy lots of stuff from them and (2) companies want to invest in China and need Yuan to do it.  Basically they keep it WAY undervalued so that their exports, which are a significant part of their economy, are less expensive for foreigners to buy....So, head to Beijing if you want to satisfy your  Big Mac craving...

No comments:

Post a Comment

View My Stats