Sunday, March 21, 2010

Exciting News!! The latest Big Mac Index is out! Where are you going to buy your next Big Mac???

This is most recent update of the Big Mac Index as compiled by The Economist magazine.  This is a measure of a concept known as Purchasing Power Parity (PPP), which suggests that in the long run currency exchange rates should reach an equilibrium in which the purchasing power of a dollar to buy a good in the US will have the same purchasing power of a foreign currency to buy the SAME good in the foriegn country.  I explain this in more detail in a previous post HERE. Also, HERE, you will find a similar index for IPOD'S.. Looking at the graph, the yellow bar extending from 0% to the right means this currency may be OVER-VALUED relative to the Dollar and to the left means the currency may be UNDER- VALUED relative to the Dollar. If you were an arbitrageur, where would you buy Big Mac's to bring them to the US to re-sell (if you could do that!)?   From THE ECONOMIST:
RECENT renewed American calls for China to revalue its currency have so far fallen on deaf ears. China has rejected accusations that America's huge trade deficit with it is caused largely by an artificially weak yuan, which has been pegged to the dollar since July 2008. Economists point out that an appreciation of the yen did little to help reduce America's trade deficit with Japan in the 1980s. But the yuan is unquestionably undervalued. Our Big Mac index, based on the theory of purchasing-power parity, in which exchange rates should equalise the price of a basket of goods across countries, suggests that the yuan is 49% below its fair-value benchmark with the dollar.
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