Tag Archives: Mexico

02.22.2013 | Purchasing Power

The Big Mac Index is out again and not much has changed. Norway’s Big Macs are expensive and Chinese Big Macs are cheap.

What do Big Mac prices tell us about purchasing power? Starting with an average U.S. price of $4.37, we can determine whether other currencies are overvalued or undervalued in comparison to the dollar. So, when we see that Norway’s Big Mac is $7.84 and a euro zone Big Mac will cost $4.88, we know the kroner and the euro are overvalued. By contrast, Mexico’s Big Mac is very inexpensive at $2.90 and predictably, at $2.57, yes, a Big Mac reflects China’s undervalued currency.

Next, I wondered whether a low price would be inexpensive domestically and discovered that we can use McWages. In 2011, a US McDonald’s employee buying a Big Mac would have needed 27 minutes of work while a person in China doing the same job needed 85 minutes. You can see, below, that a McDonald’s Indian employee needed close to 200 minutes to buy what he or she was making.

Finally, as economists, we should note that the Big Mac Index takes us to purchasing power parity (PPP). This 2 page St Louis Fed paper, though dated, provides the perfect discussion of PPP and the Big Mac.

Sources and Resources: I definitely recommend going to The Economist to see all Big Mac prices and to use their interactive graphic on current and past purchasing power parity. More academic but fascinating, the Ashenfelter paper on McWage purchasing power is here while a good summary of the paper and the source of my graph is at WSJ.com.

Note: This post has been minimally edited since it appeared.

Posted by: adminEcon
Tags: Big Mac Index, China, exports, imports, McWages, Mexico, Norway, Orley Ashenfelter, overvalued, purchasing power, purchasing power parity, St. Louis Fed, The Economist, undervalued
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06.12.2012 | “It’s Not Easy Being Green”

Hearing Kermit the Frog say, “It’s not easy being green,” Mexican environmentalists might agree.

Since March 2009, Mexican households have been offered cash payments or subsidized loans for replacing refrigerators and air-conditioners that were more than 10 years old with new energy efficient appliances. The goal was to diminish electricity usage and carbon dioxide emissions. So far, 1.5 million households have participated.

Surprisingly, refrigerator savings were less than expected and air-conditioner use increased. Researchers believe that newer refrigerator models were larger and had extra features like ice makers that somewhat offset their energy savings. For air-conditioners, people just used them much more.

Energy savings programs are tough to design and evaluate. As with refrigerators and air-conditioners, changing incentives can have unpredictable consequences. In addition, even if an energy savings program does not save energy, it still could provide considerable benefits far beyond its costs because of better refrigeration and cooler homes. And finally, we should always remember the “rebound” effect. Explained by William Jevons in an 1865 book called The Coal Question, the “rebound” effect resulted when the energy efficiency created by the steam engine encouraged more energy use rather than less. Jevons said, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is truth.”

Maybe Kermit was right.

This NBER paper fully describes the Mexican cash for coolers program and if you want to read more about the rebound effect, I suggest this fascinating New Yorker article. For a more academic study, this Congressional Research Service (CRS) report explains that the “rebound” effect is most evident in a developing economy because slack demand can lead to considerable increase in energy use. In a mature market, the “rebound” effect is less pronounced.

Posted by: adminEcon
Tags: air-conditioners, American Recovery and Reinvestment Act of 2009, carbon dioxide emissions, cash for clunkers, cash for coolers, cost/benefit, developed nation, developing economy, emerging market, energy efficiency, environment, green, Mexico, negative externalities, price elasticity of demand, rebound effect, refrigerators, stimulus
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06.14.2011 | Trading Places

A switch has taken place.

More than half of our imported goods used to come from the G-6 countries (Canada, France, Germany, Italy, Japan, the U.K.) Now, we import more from China, Mexico and Brazil.

Specifically, in 1987, 55% of U.S. merchandise imports came from Europe and Japan. Now the total is down to 31%. By contrast, China, Mexico, and Brazil send us 32% of the goods we purchase from abroad. (Scrolling down here, you can see where the remaining 37% is coming from.)

And, according to economist Michael Mandel, perhaps we are importing even more from China, Mexico and Brazil than the statistics indicate. If goods are now cheaper, then recent dollar totals may mask an even higher quantity.

According to another point of view, though, maybe we are importing less. Take the iPhone. Assembled in China, its components come from 9 countries, including the U.S. Should it count as a Chinese export in U.S. trade statistics if researchers have calculated that the value added by the Chinese is only $6.50 out of a wholesale price of $178.96?

The Economic Lesson

Called net exports, a nation’s trade balance is the value of exports minus the value of imports. Simply defined, exports are goods produced in the U.S. and sold abroad. Imports are goods produced abroad and sold in the U.S. When the U.S. sells domestically produced goods that are worth more than those it imports, it has a trade surplus. It runs a trade deficit when the opposite is true. So, if a country imports a car for $20,000 and exports a tractor for $100,000, it has a trade surplus of $80,000.

An Economic Question: Would you record the iPhone, with components that are made around the world but then assembled in China, as an import from China? Explain.

Posted by: adminEcon
Tags: Brazil, China, exports, G-6, imports, iPhone, Mexico
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06.09.2011 | Debt Deja Vu

Again, Greek debt was in the news. This time, though, the focus was other defaults. For as long as nations have existed, they have borrowed money and then been unable to repay it. The first report of Greece defaulting on her debt was during the fourth century B.C. At the time, 10 Greek municipalities could not repay what they owed to the Delos Temple. During the past 2 centuries, Greece defaulted five times: 1826, 1843, 1860, 1893, 1932.

Who else has defaulted? We could look at Mexico. In 1982, she could not meet her debt obligations, and then again in 1994. 4 years later, Venezuela, Russia and Ukraine were at the center of a debt crisis. Then, in 2002, it was Argentina.

Looking at more than 50 nations during several centuries, this paper from Kenneth Rogoff and Carmen Reinhart explains the default story. It also tells us that countries that have never defaulted include the U.S., Canada, New Zealand and Australia; the Scandinavian countries; Taiwan, and Singapore (p. 14). In another study, scholars say that since 1830, the world has undergone 8 “default waves” in which “bunches of countries” have been unable to repay what they borrowed (p. 4).

The message? The current European debt crisis is not unique.

The Economic Lesson

Sovereign debt is money borrowed by a sovereign government. Governments borrow money by selling “IOUs” to individuals, businesses, banks, and other governments. The IOUs are different types of government bonds.

When people refer to sovereign default, they mean the borrower is not adhering to the original IOU contract in some way. The borrower might not be paying interest that was agreed upon or the principal or may have moved the maturity dates to a later time.

An Economic Question: Why might Alexander Hamilton have said that a nation’s debt is a blessing as long as it is not excessive?

Posted by: adminEcon
Tags: bonds, Carmen Reinhart, default, Kenneth Rogoff, Mexico, sovereign debt, sovereign default
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