Wikinvest Wire

China, Big Macs, Roach, and Krugman

Friday, March 19, 2010

The Economist's recently updated Big Mac Index seems to add credence to the views of Mr. Krugman over those of Mr. Roach from this item earlier today, part of an increasingly nasty dispute (at least, for economists) about China's currency policy.
IMAGE Does anyone know if there is any empirical data on using the Big Mac Index as the basis for a FOREX trading strategy? It seems pretty simple and, over the long run, would likely be profitable to bet against the overvalued currencies and go long the undervalued ones.

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Peachtree said...

A few years ago, The Economist did actually list some papers which it reported as showing that the Big Mac Index was neither better nor worse that other currency valuation methods.
My own observations suggest that Big Mac over/under valuation can persist for long periods (around 2 years) which make it unsuitable for a trading strategy.
The other point I would note is that developing country currencies seem to stay permanently undervalued (vs. US$), which I guess is something to do with them issuing debt in US$ and not in their own currencies.

Anonymous said...

The Big Mac index mostly shows differences in local production costs. Countries that heavily tax Big Mac inputs tend to have expensive Big Macs. Property tax, employment tax, sales tax, zoning restrictions, etc... Nobody in North America could live on what they pay restaurant employees in the third world.

Its not just a matter of exchange rates. Big Mac prices would be lower in third world countries even if there was one world currency.

alex west said...

only complete boneheads from Economist could have come up with BigMac theory

well they're brits.. none is good over there anyway..

my point is ... cost of Big Mac is just a price of local production...
price has relevance only compared w/ average income of people buying those Big Macs..

lets take Russia and USA for example... come there often...

in Russia Big Mac costs about 2-2.2 $.. let say in US 2.5-3 $ ( im not sure about 3.57$ in USA.. it depends of location)

thus boneheads think Russian ruble is undervalued...

what a load of crap.. they forgot simple fact.. in Russia average salary is about 400-500$. in US what... 3-4,000$ per month... so according PPP either cost of Big Mac must come down in Russia by factor in 5,6 times,
or average salary must up same...

its called 'Comparative Advantage' by David Ricardo..

no wonder GB is $$ucked up... as stupid as it gets..


Anonymous said...

Exactly, Big mac is more a measure of local cost than currency. to be more specific, the labor cost. I.e. the difference of cost to living in Norway or in China.

If every thing in China cost the same as Norway(or USA), the labor cost will be similar as well, then the big mac index will reflect the currency manipulation.

How can everything cost the same in China and USA? I guess two ways, let the Chinese consume as we are. I don't think the earth can sustain that without new energy source. Or let us cut back so we live as the Chinese live their life.

Anyone here willing to do this?

Any politician dare to say that?


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