With a lot of tough news in this week’s headlines, today we want to turn to “PPP.”
No, that doesn’t stand for “PowerPoint presentation.” It stands for “purchasing-power parity,” which is a simple way to measure whether currency exchange rate values are at good equilibrium levels around the world.
An easy way to do this is to take the price of one common item that is sold around the world and look at how it is priced in various countries, translating the prices back to U.S. dollars at the current exchange rate.
The most famous example of this is the Big Mac Index, which was invented by The Economist in 1986 as a lighthearted way for people to familiarize themselves with global currency exchange rates using the price of a hamburger. While vastly simplistic and usually used for long-term equilibrium levels, there are some fun conclusions you can draw from today’s Big Mac Index.
The average price of a Big Mac in the U.S. this summer is $5.30. The index shows the price of the burger in 55 other countries as of July.
You can see that in only three countries is the Big Mac more expensive than in the U.S.: Switzerland, Norway and Sweden. The fact that most countries prices are cheaper suggests that the dollar is generally overvalued, as we all know from an historic point of view.
The other observation is that the price gets closer to the U.S. in the developed nations around the world while the cheapest prices are found in emerging market countries, with one exception: Japan. While partly a function of exchange rates, the global price disparity results mostly from the different income levels around the world and reflects the stall in Japan of any income increase over its years of deflation.
Let’s take a look at the Big Mac’s price in China. We hear a lot about the Chinese Yuan being undervalued and it is true that a Big Mac in China is only $2.92, 45 percent less than in the U.S. But other countries in that region, such as Hong Kong, Taiwan, Vietnam and Malaysia, sell the Big Mac for even less – a good reminder that pricing discussions are always relative.
To conclude, if you are a globe trotter and a Big Mac eater on a specific budget, don’t eat them in Switzerland, Norway or Sweden. Go to South Africa, Russia and Egypt for the least expensive Big Macs. And if you’re truly looking for value, grab one in Tokyo!
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