Big Macs and Currency Manipulators

by Elaine Schwartz    •    Oct 24, 2012    •    782 Views

In China, a Big Mac costs close to the equivalent of $2.44. That same burger in the US is $4.20. The basic idea is PPP, purchasing power parity. The dollar can buy more when the yuan is undervalued. And President Obama and Governor Romney have both indicated that an undervalued yuan displeases them.

Actually, they probably would not mind if price fluctuated naturally in foreign currency markets. Instead though, they say currency manipulation might be occurring because a government is intentionally, over a long time period, affecting the demand for and/or supply of its money. And by impacting demand and/or supply, they are shaping its price.

China, though, is not the only one. We could add to the list, Denmark, Hong Kong, Israel, Japan, Singapore, Taiwan, Korea, Switzerland, Argentina, Bolivia, Malaysia, Philippines, Thailand, Angola, Algeria, Libya, Saudi Arabia, Azerbaijan, Russia. Some overvalue and others undervalue. But all, according to the Peterson Institute, are engaging in “currency manipulation.”

Finally though, I wonder whether currency “manipulation” is necessarily bad. One position says, “Yes.” An undervalued foreign currency lowers US demand for US made goods and destroys US jobs. The other side says that consumers and businesses that purchase Chinese goods benefit from their artificially low prices. Because consumers have extra money to spend elsewhere, jobs are created. In addition, businesses that buy Chinese metals and motors, for example, have lower costs.

Sources and Resources: To check out the PPP of other currencies, you might enjoy the Big Mac Index and also an econlife PPP explanation. For all the detail you could ever want about currency manipulation from many viewpoints, this Peterson Institute paper, this Treasury Department report and this Mark Perry blog are ideal complements.

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