This week saw a bit of a dearth in major economic news outside the U.S., as financial news in the U.S. focused on the U.S. fed meeting. But although we comment frequently on macroeconomics events and trends, there was microeconomic news out this week that deserves attention.
Starbucks found itself defending the price of its lattes in China after a report on Chinese television noted how Chinese latte prices are higher than in Chicago and London. Now, we can discuss all day the reasons and merits of whether or not prices are justified, but it did remind me of a staple of pop cultural economics – the "Big Mac Index."
The Economist magazine came up with the Big Mac Index in 1986 as a practical way to relay the economic concept of Purchasing Power Parity around the world. In simple terms, the Index is a measure that takes a product considered the same all over the world (although many will argue with that premise) and compares how much it costs to buy it in different countries. Although intended as a tongue-in-cheek analysis, the Index has been quoted in several economic textbooks and over 20 academic publications.
The current Index of major economies shows the average price of a Big Mac in the U.S. to be $4.56. Across the Euro zone, the price is 10 cents more. The most expensive Big Macs in the world are in Switzerland at $6.72 and Sweden at $6.16. The cheapest Big Mac in the Index? Hong Kong at $2.19 and mainland China at $2.61. Yes, the irony compared to a Starbucks latte price is a bit glaring.
Be that as it may, looking at prices around the world does lead us back to macroeconomics, as much of the discussion among investors returns to central bank policies and how those may shift in response to economic conditions. First up next week is the European Central Bank. Besides having expensive Big Macs, the Euro zone reported surprisingly high unemployment numbers this week and surprisingly low inflation data. Up until this round of data Europe was looking pretty good. Nevertheless, chatter in the markets this week did start the rumors that maybe it is time for the ECB to cut rates.
My View: Markets are clearly refocusing on fundamental economic drivers and policy prescriptions. Stay with us over the next few weeks as we close out the year and look at the trends shaping up for 2014.
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