Saturday, February 20, 2010

Big Mac Index Explained----

The Big Mac Index is a creation of The Economist magazine...It is a measurement of an important economic concept called Purchasing Power Parity, or "PPP" for short.  PPP suggests that over time the prices of similar goods SHOULD be relatively EQUAL in terms of the purchasing power of the local currency it takes to buy it, REGARDLESS of the currency or country it is sold in.  It is by no means a perfect measurment and there are many variables that may account for differences in costs of producing a Big Mac in, say, New York compared to Mexico City. However, it gives as some idea of what exchanges SHOULD be and then we can compare them to what the REALLY are in the Foreign Exchange Market and determine if currencies are over-valued or under-valuded relative to each other....Here is an example:

The Economist uses a Big Mac price of $3.57 in the US. A Big Mac in the Euro area costs €3.31. If we take the Big Mac in Euros divided  by the price in Dollars we will get a PPP exchange rate of Euros in terms of Dollars---€3.31/$3.57 = €.927.  This means, according to PPP, $1.00 will exchange for €.927 and the reciprocal, €1.00 will exchange for $1.078.  What is the ACTUAL exchange rate in the FOREX?---$1.00 = €.739 or €1.00 = $1.353. To find out what a Big Mac will actually cost dollar holders, we take the Big Mac price in euros, €3.31, and multiply it by actual exchange rate of $1.353 which equals $4.48! AND if a holder of Euros exchanges their Euros for Dollars to buy a Big Mac in the US, they will pay $3.57 multiplied by the actual exchange rate of €.739 which equals $2.69! Not a deal for holders of dollars BUT a deal for holders of Euros....

The basic formulas you need to know...
(1) To find PPP take the Big Mac Price in the local currency and divide it by the Big Mac Price in Dollars ($3.57 everytime)
(2) This will give the foreign currency price per dollar (in PPP), or "How many ___(insert name of currency) does it take to buy $1.00".
(3) Take the reciprocal of the number you found in (2) to determine "How many dollars does it take to buy___(insert name of currency)"
(4)...(2) and (3) give you the PPP exchange rate
(5) Find the ACTUAL exchange rate for (1) a dollar to buy ___(corresponding currency) and  (2)___(corresponding currency) to buy a dollar. In our example above--a dollar bought €.739 and a euro bought $1.35.
(6) Take the actual exchange rate for a holder of dollars (in our example we had to pay $1.353) to buy the currency and mulitply it by the Big Mac price in the foreign country to get how much in dollars the Big Mac will cost you.
(7) Take the actual exchange rate for the foreign currency (in our example they had to pay €.739) to buy a dollar and multiply it by the Big Mac price in the US (always $3.57) to find out how much in dollars it will cost the foreigner to buy a Big Mac in the US.

Examples for you to work:
Country          Price of Big Mac in this country
Mexico             33 Pesos
China               12.5 Yuan
Britain              2.29 Pounds
Norway            40 Kroner
S. Korea           3400 Won
Pakistan            190 Rupee
Japan                320 Yen

Go through each question above, 1-7 and answer accordingly
To check your work CLICK HERE.
Go HERE for current exchange rates

Geography?? Geography?? I don't need no STINKIN' Geography!!!

Mr. Huston amd Mr Patty are crying right now....

Niger, not Nigeria – Price of crude oil rises at the news of Niger coup. 
Confusion over the names of two similar-sounding African countries may have helped boosted oil prices to near $80 a barrel this week as traders rushed to buy oil after reports of a military coup.  A Reuters reporter received a flustered phone call from a hedge fund partner who had heard animated discussion in the market about an incident in Nigeria, only to realise that traders had muddled up Africa’s biggest oil producer with its neighbour Niger. “Markets took off at around the same time a Reuters story came out about gunfire erupting in the Niger capital in an apparent coup bid, mistaken by many as being Nigeria,” said Tom Bentz, analyst at BNP Paribas Commodities.

Hungry??? What does that have to do with the price of Beef in Argentina???

The Wall Street Journal has an excellent example of government intervention in the economy that produces results consistent with economic theory---shortages that lead to high prices...Argentina implement price AND export controls on beef in an effort to (1) keep prices low domestically and (2) to keep meat in Argentina instead of selling on the international market. 
"Economists blame the price spiral on chronic overspending by the government of President Cristina Kirchner, as well as interventionist policies such as price and export controls on beef, which they say have discouraged investment and reduced the supply of cattle...For her part, Mrs. Kirchner blames rising meat prices on Argentine ranchers, whom she says aren't bringing enough cattle to market....Eduardo Buzzi, head of the Argentine Agrarian Federation, an industry group, called Mrs. Kirchner's comments "tragicomic."He faulted "antiproductive" government farm policies, such as controls on domestic beef prices and on the amount of beef that can be exported....Agrarian economists say government meddling has been so disruptive that many ranchers have liquidated herds and turned to farming. A drought last year also hurt ranchers...Argentina's total cattle herd has fallen to 50 million head from around 61 million in 2007, according to the Argentine Rural Society, a landowners group."
It is mistaken to believe that if you artificially set a price below the generally accepted market price you will have a higher quantity of beef supplied and that the quantity demanded for beef will not be MORE than it was before the price control.  The only way to bring it back into equilibrium would be to reduce demand...

"Private economists calculated last month's inflation at more than 2%, the highest level for a January since 1992, though the officially calculated rate is lower. Especially painful—for the world's largest per capita beef-consuming nation—are increases in beef prices of roughly 25% so far this year."
It certainly does not seem likely that this will happen in the domestic market for beef in Argentina. They seem to love their burgers and steaks.  Graphically, a price ceiling  looks like this:

A price below the equilibrium price will reduce the Quantity Supplied to Qs and increase the Quantity Demanded to Qd...As evidenced in the market for beef in Argentina, the predictable shortage is driving up the domestic market price for consumers. Also, the international market does not benefit from Argentinian beef and it serves to increase the international price of beef, therefore OUR prices in a tangible way...Bottomline---ranchers are hurt, consumers are hurt with higher prices---who benefits in this scenario?? Anyone? Anyone? Anyone? 

Tiger Woods "Apology"--Feel Manipulated?

I guess I am getting old and cynical OR I am maybe I am just more adept at seeing through things and looking for an "angle" (thank you Frederic Bastiat!). While his apology may have been sincere the atmosphere was not.  Speech probably prepared by experts and certainly the whole room was choreographed...Why can't people just be direct and honest in situations like this?  Blahhh!!! I am out on Tiger Woods and his entourage...A quick analysis of "the room" is below...If you are going to be in Public Relations or Marketing this will be of interest to you....

Does spending more money equate to a better education???

If the data are correct, it seems you could send every child in D.C. to a private school with  fully paid tuition AND room and board...I wonder why they cannot have better outcomes spending this amount on education...I realize it is a tough district with immense challenges, but spending almost as much as a Harvard (or SMU or TCU or Rice...) on elementary and secondary education per student each year??...(More info at Carpe Diem)

Thursday, February 18, 2010

Where is mobile phone usage the highest and lowest? The number one user was a surprise to me...

Where is mobile phone usage the highest and lowest? The number one user was a surprise to me...
"By the end of of 2010, there will be 5 billion mobile-phone subscriptions globally. A decade ago a mobile-phone user spoke for an average 174 minutes a month, according to the GSM Association, an industry group. By the end of September 2009 that had risen to 288 minutes. There are huge differences in usage among countries. Puerto Ricans are the chattiest, probably because cheap plans include unlimited calls to the American mainland where family and friends are often based. Americans, too, like a good gas, racking up 835 minutes (though some of these are incoming minutes, which are paid for by the subscriber)."

A Dunder-Miflin moment in Junior High---FUNNY reason for Detention!!!

Dont you wish you were this student and got written up for this?  A Dunder-Miflin moment in junior high school...Epic, as students say...:)

What do George Soros and Glenn Beck have in common? GOLD!!!

What do George Soros and Glenn Beck have in common?  Why Gold, of course...Seems that the extremes on the left and right agree on one thing---gold is a potential hedge against US dollar inflation...
"US billionaire George Soros has more than doubled his investment in gold, despite calling it the "ultimate bubble" just weeks ago."

Happy Birthday $787 Billion Fiscal Stimulus Plan---How have you done???

These two links provide a Pro and Con view of the effectiveness of the $787 Billion dollar stimulus package passed one year ago today...

(HT: Mankiw for links)

Wednesday, February 17, 2010

That means WHAT in Cherokee!!

Really neat interactive graph!! Click and Drag the mouse over the map and find out the meaning of cities, towns, lakes, rivers, etc in their corresponding Native American languages. Many places we know and visit have some unique translations...

Is your flight canceled? Dont know why? Check it out...

Last fall the Department of Transportation in response to legitimate complaints of airlines stranding passengers on tarmacs for extended periods of time, issued new rules and fines for offending arilines.  The unintended consequences may be a marked increase in the number of flight cancellations .  The new rules take effect on April 29, 2010.  Instead of risking heavy fines (up to $27,000 per passenger) airlines many simply cancel flights because to do so is less expensive than the fines.
The government announced in December it would fine airlines $27,500 per passenger for long tarmac delays - or $2.75 million for a 100-passenger flight...Cancellations cost far less than a huge fine, especially since seats are routinely prepaid and airlines save fuel cost.
I dont fly that often and have never experienced a long delay (nothing more than 1 hour, I believe) and I am sure I would be highly annoyed by a  3+ hour delay.  However, if airlines, as to individuals,  respond to incentives it seems like they will cancel flights if there is an indication that a lengthy delay is in the works. 
What do you think?  Are the fines a deterrent to prevent delays or an incentive to cancel flights? Which is worse for the traveling public?  I am unsure on this one...

(HT: Carpe Diem)

Sunday, February 14, 2010

What Do A Baby and A Marine Have in Common?? A Mom will be able to relate...:)

I saw this billboard on the way back from College Station in the town of Riesel, which is somewhere between College Station and Waco on Hwy 6.  Drove past it for a couple of miles before deciding to return to take a picture.  The juxtapostion between the baby and the Marine prompted me to make a connection between the two.  Parents of Servicemen/Servicewomen may be able to relate to the first thought I had:

"You take care of and protect them as individuals when they are babies.  When THEY grow-up they individually take care of and protect US collectively as a country"...
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