Friday, October 15, 2010

According to the latest Big Mac Index, the Chinese Yuan has Appreciated in value relative to the dollar by 20%!...This should be BIG news in the Media, right??

     Here is the latest "Big Mac Index"(graphic below) produced by The Economist magazine AND one produced in January 2010 (click HERE and HERE for my explanations of how The Big Mac Index works).  Look at the cost of a Big Mac in the Euro area and then in China. How has the dollar price of a Big Mac changed in 9 months in each place?  In January it took $4.79 to buy one in the Euro area (they took a weighted average) and in October it took $4.84 to buy one.  So in dollar terms it became MORE expensive to buy a Big Mac. This implies the dollar lost value, or depreciated, relative to the Euro.  Indeed, depreciation relative to the Euro has taken place this year.  In China, a Big Mac cost $1.83 in January and in October it cost $2.18 (this is the amount we would give up to buy enough Yuan to purchase a Big Mac in Beijing).  This implies the dollar lost value, or depreciated, relative to the Yuan (Chinese currency). SAY WHAT? This is NOT what has been the political discussion as of late.  China has been criticized for NOT letting its currency appreciate relative to the dollar (as it SHOULD if it was traded in a flexible FOREX market) which would make its goods and services more expensive for us to buy and our goods and services less expensive for the Chinese to buy.  This presumably would lead to more balanced trade. 
     According to the Big Mac Index, from the two different time periods, Yuan appreciation HAS occurred. The dollar price of a Big Mac in China has INCREASED 19.6% ($2.18 minus $1.83 = $.35 divided by $1.83 times 100)!!  The following could be happening: the Yuan has significantly appreciated in value, which would be BIG news, or there is Big Mac Inflation in China, or a combination of the two. We certainly have not seen nearly 20% appreciation, so I have to suspect inflation. One product does not make a trend, but is inflation rearing its ugly head in China?  I pulled the thread---extra credit for doing the legwork to find out if this is the case...  

The Economist

Here is one previously published in January 2010:

Note: the price of a Big Mac increased in the US, from $3.58 to $3.71, which is an increase of 3.6%. Can we say we have had inflation in the US for the last 9 month? what else might contribute to the price increases in the US AND China for the Great Sandwich??  Extra-Extra Credit!!
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