Tag Archives: The Economist

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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11.08.2012 | Beer Economics

In China, 1/2 liter of beer costs 9 minutes of work.

To calculate how many minutes of work it takes to buy beer in 150 countries, Swiss bank UBS researchers divided the median wage in that country by the price of 1/2 liter from a retailer. Their results? Beer drinking is most costly for workers in India (55 min.), Philippines (48 min.), Colombia (47 min.) and Nigeria (29 min.). At the other end of the list is the US (5 min.), Czech Republic (7 min.), Germany (8 min.), the Netherlands (9 min), and China (9 min.)

The UBS report reminded me that national beer consumption relates to affluence. According to the American Association of Wine Economists (yes, really) the connection between beer and per capita income is an upside down “U.” As individual incomes increase up to $22,000, so too does beer consumption. Then though, when wine and spirits become affordable, people move from beer to pricier liquor. Currently, nations with emerging markets represent two-thirds of the world’s beer consumption. (The ascent of China’s beer drinking curve in the graph below is striking.)

So, when anyone mentions beer, we can think about of purchasing power, economic growth and demand from the developing world.

A Final Fact: Beer has also been in the news as a source of government revenue. President Hollande just said France’s beer tax will rise by 160% to fund programs for young people and the elderly. Meanwhile, 2 years ago, after Russia spiked its beer tax by 200%, beer purchases declined.

Sources and Resources: This BBC article on the impact of the impending French beer tax was a good read as was the Economist’s details on the UBS beer cost study. More academic, the AAWE paper was the source of my beer drinking information about developing nations. Please note that all information from UBS and The Economist is current while data and the graph from the AAWE is from 2010 and before.

World Beer Consumption, 1961-2007

Posted by: adminEcon
Tags: American Association of Wine Economists, beer consumption, beer taxes, China, developing nations, economic growth, emerging markets, France, India, per capita income, purchasing power, Russia, The Economist, UBS, US
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10.24.2012 | Big Macs and Currency Manipulators

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.

Posted by: adminEcon
Tags: Big Mac Index, China, consumers, currency manipulator, demand, foreign currency markets, Governor Romney, job creation, overvalue currency, Peterson Institute, President Obama, supply, tariffs, The Economist, undervalue currency, unemployment, Wal-Mart, WTO
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09.19.2012 | Playing Chicken With China?

Yesterday’s headlines about the US taking China to the World Trade Organization (WTO) for unfair auto and auto parts subsidies took me to chicken feet and The Economist’s Sinodependency Index. Knowing the major firms that depend on China for revenue might help us further assess our relationship.

Approximately 20 years ago, chicken paws, used primarily for animal feed, were worthless. Now though, with Perdue producing more than a billion chicken feet a year, paw exports annually return $40 million in revenue. The reason is China.

A delicacy in China, chicken feet are a perfect U.S. export. US chickens are fat and juicy because we grow big chickens. In addition, their “natural scarcity” (only 2 per chicken) bestows some prestige on diners who order them.

Similarly, Intel, Apple, IBM and GE generate considerable revenue from China. Called a Sinodependency Index, The Economist displayed the relative revenue dependence on China of 135 firms in the S&P 500. Their goal was to show the extent to which China has woven its presence within the fabric of world trade.

Although some of their statistics were rough because of each firm’s revenue breakdown, The Economist believed that their Index conveyed the information effectively. In a copy of their chart below (interactive with percents if you visit their site here), you can see their color coding for industry and size coding for how a firm’s revenue compared to the other 134 in the index. The top 10 in their list, in size order, are: Intel, Apple, IBM, GE, Caterpillar, Procter & Gamble, Johnson & Johnson, Yum Brands, Philip Morris, Boeing.

As economists, we could not conclude without mentioning comparative advantage. First explained by 19th century economist David Ricardo, comparative advantage says that worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make. But, what to do when a nation employs unfair trade practices like subsidizing their exports to make them cheaper and adding duties to imports to make them more expensive?

My Sources and Resources: A wonderful podcast and post from Freakonomics was the source of my chicken feet facts while you can look directly at The Economist’s Sinodependency chart, their article and a link to the math behind the Index here. For more on the current trade dispute in the World Trade Organization (WTO), here is one article from Bloomberg. And here, this EconLife post presents more on a past trade dispute with China that involved chicken paws and is the source of 2 sentences in this entry.

Trade Dependency on China From the Economist

135 Firms From S&P 500: Revenue From China from the Economist

Posted by: adminEcon
Tags: apple, Bloomberg, chicken paws, China, comparative advantage, David Ricardo, duties, Freakonomics, GE, IBM, Intel, J&J, opportunity cost, S&P 500, Sinodependency Index, subsidies, tariffs, The Economist, trade disputes, unfair trade practices, world trade, World Trade Organization (WTO)
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