Friday, July 25, 2008

Currencies out of whack, says Big Mac

A McDonald's Big Mac burger is over-valued by 50 per cent in the eurozone when compared to its price in US dollars and under-valued by 49 per cent in China, the Economist magazine says.

The magazine wrote that according to its Big Mac Index, which compares exchange rates that should leave a Big Mac burger costing the same in US dollars everywhere, "many currencies look more out of whack than in July 2007, when we last compared burger prices".

A Big Mac costs on average $US3.57 in the US.

But in the eurozone a consumer with the US currency in hand would have to change $US5.34 to buy a burger in euros.

For the two currencies to have the same purchasing power at McDonald's, the euro should be worth $US1.06, rather than $US1.57 at present, suggesting that the single currency is over-valued by 50 per cent against the US dollar.

But the Economist found that "the dollar buys a lot of burger'' in Asia, concluding that the Chinese yuan for example is under-valued by 49 per cent against the US dollar.

Elsewhere, the survey found that the Swiss franc is over-valued by 78 per cent against the US dollar, the British pound 28 per cent and the Norwegian krone 121 per cent.

http://www.news.com.au/business/story/0,27753,24075470-462,00.html

1 comment:

Louis said...

Currency rates often do not tell the whole story. There is another figure for that: purchasing price parity. We don't know how much regulations and governmental controls have distorted these figures. We don't know the cost of the inputs: that is, labor and the costs of facilities. Often, foreign prices seem a batgain. That is why some people travel-- cheap goods.

Europe is Social Democratic and prevents competition, so it's prices may be higher because of that. Who knows? Certainly not rthis author.

This is a very a simplistic comparison that makes no pretense at deeper truths.