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Stock Ideas Investors Daily Edge Expensive Countries Mean Expensive Hamburgers
Stock Ideas Investors Daily Edge Expensive Countries Mean Expensive Hamburgers 
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| Expensive Countries Mean Expensive Hamburgers |
| Tuesday, 02 September 2008 | ||||||||
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I’ve always been a big fan of the Big Mac Index. Maybe that’s because I was living and studying in London when Mickie D’s opened its first overseas restaurant in central London back in the 70’s. The Economist came up with the Big Mac Index back in 1986 and it’s been published annually ever since. The idea is that Mickie D’s hamburger is a standard item made from standard food inputs – regardless of where in the world the restaurant is located. So it should cost the same anywhere in the world. The index is far from perfect. The standards aren’t as uniform as they used to be for one thing. For another, fixed (or non-tradable) costs vary greatly from country to country. It doesn’t work so well when comparing a McDonald’s in an undeveloped country to one in a developed one. The Economist has also done a Starbucks Tall Latte index but I still like the Big Mac Index the best. The most overvalued currencies reside in triple-digit overpriced Norway, plus Sweden, Switzerland, and Iceland. All European countries. The most undervalued? The Philippines, Pakistan, Taiwan, Thailand Indonesia, China, Hong Kong and Malaysia – Asian countries all except for the one country in the subcontinent. Surprisingly, one of the most expensive cities in the world – Moscow – has a currency which is undervalued by 29 percent. What does this say about the dollar? Hard to say. If you think the Big Mac is more realistically priced in Europe than in America, then it’s not so much the European countries that are overvalued but the dollar which is undervalued (against European currencies). Or if you think the Big Mac is more realistically priced in Asia, then the dollar is overvalued against Asian currencies. That sounds about right. Europe’s expensive currencies are putting a dent in its exports. And Asia deliberately holds down the value of its currencies to expedite their exports. You shouldn’t expect this to change much in next couple of months.
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