September 7th, 2009
06:02 AM GMT
You know how it is –- you’re in a strange city, maybe a strange country, tired, hungry, missing home, it's kind of late. You walk into that little (in my case, Chinese restaurant), there are teeth marks on the chopsticks, the floor is kind of sticky, and on the menu is the house specialty: rabbit face. Not quite what you wanted, but as luck would have it, just down the road you can see it in the distance – the golden arches, sitting high and proud calling to you.
OK, this might be (in my case) China, but you know that somehow, once you walk through those doors, there on the menu will be a cheeseburger, a Big Mac, Quarter Pounder and fries. And for the most part the food will taste pretty much like the Mickey Dee’s on Santa Monica not far from my old apartment in LA.
So, when I buy my Big Mac here in China, it’s just over 12 RMB, or $1.76. When I buy a Big Mac in L.A. it costs around $3.50. The great thing about a Big Mac as far as economists are concerned (wel, the ones at “The Economist” magazine, anyway) is that it's pretty much the same wherever you go . . . two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun.
And that means for economists it’s a great way to compare currencies. Much like the Big Mac itself, it’s not perfect – wages, rents and other costs vary, as well as the size (I have noticed the Chinese burgers a little on the small side). But for more than 20 years the people at “The Economist” have been doing this exchange rate comparison, and – surprise, surprise – they found Asian currencies under-valued, European over-valued.
In the case of China, by about 40 percent undervalued – this is at the far end of the spectrum as far as many critics in the U.S. are concerned. They accuse Beijing of deliberately manipulating the currency, keeping it undervalued. That means exports from China are a lot cheaper, giving exporters here an unfair competitive advantage, they claim.
Imagine if you could go to that McDonald’s in L.A. and instead of paying $3.50 or so for the American Big Mac, you could pay $1.76 for the Chinese version, knowing the ingredients are the same.
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