This is fun. The Economist has found a way to explain Foreign Exchange in plain English. We can make sense of it by Burgernomics, or, The Relative Cost of a Big Mac.
The idea is that “in the long run exchange rates should move to equalise the price of an identical basket of goods between two countries”.
So, if we consider the Big Mac, it should cost your average Londoner as much as it costs a Canadian to buy a Big Mac in their respective countries’ currencies. But it doesn’t. In Canada, it costs $4 to buy a Big Mac whereas Europeans pay (the Euro equivalent of) $4.33. This means the Euro is overvalued. In contrast, my Chinese friends in Hong Kong are paying only (the yuan equivalent of) $1.90 for their burger.
And what meaning does all this have for you, gentle readers? Well consider this. When planning your next holiday, do you want to pay $1.90 for a basic burger, or join me on my 2012 holiday in paying $13 for the same meal?
Photo Credit: Roffe used under Creative Commons License.
I’m not an economist, but I think the point (or one of the points) of The Economist’s “big mac index” is showing how the real world doesn’t live up to classic economics theories (humans and corporations act 100% rationally, “all other things being equal”, etc., and specifically the theory of purchasing-power parity).
I’m guessing the price differences in the real world are caused by different laws, policies, taxes, tariffs, etc. etc. in different territories.
With a few exceptions, I think you can read the +/- list as an indicator of the standard of living compared to the US.
By the way, Hong Kong’s currency is the Hong Kong dollar: http://en.wikipedia.org/wiki/Hong_Kong_dollar
.-= Jan Karlsbjerg´s last blog ..Vancouver Blogger Meetup June 2010 Recap =-.
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I’m glad I’m not a McDonald’s customer. They would go bankrupt with my yearly one or two meals I have from them, but you got some point here.
We can’t just move around the globe where your money is worth more ( or you can, if you really want to). We have to make some choices to how we spend what we have.
.-= The Financial Power´s last blog ..Summer Entertainment without Wrecking Your Budget =-.
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@Jan As usual, you have a better grasp on my own posts than I do myself! I did notice that Denmark wasn’t even listen – can I assume your kin are too smart to eat that kind of junk food?
@The Financial Power Thanks for popping by! I look forward to your blog posts.
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Ha, no McDonald’s certainly present in Denmark. Denmark usually appears very close to Sweden on lists like this.
The first time I heard mention of the Big Mac Index was a year where Denmark’s score was very anomalous because of a price war in the week where the samples were collected.
By the way, I’m still waiting for McDonald’s to launch the “McFitness” burger.
.-= Jan Karlsbjerg´s last blog ..Quote of the Day =-.
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