### Archive

Posts Tagged ‘PPP’

## Big Mac Index – with a pinch of salt?

Here is a useful video clip on the Big Mac index – also referred to as Burgernomics. Developed by “The Economist” magazine it is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad – the video explains PPP and shows how undervalued / overvalued an exchange rate is relative to a Big Mac exchange rate.

For example, the average price of a Big Mac in America in January 2015 was \$4.79; in China it was only \$2.77 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 42% at that time. However, the index does not consider the different levels of income, as most of the burger’s cost depends on local inputs which vary considerably between countries. See the clip below

Categories: Exchange Rates Tags:

## New Zealand PPP below OECD average

Below is graph that shows the GDP per person and Purchasing Power Parity (PPP). During the 1970’s New Zealand was well above the OECD average but has had a downward movement since 1982. Australian continues to hold its own.

Categories: Growth Tags:

## Big Mac Index Worksheet

THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.

Here is something that I put together using the the Big Mac index (July 2013) from The Economist website. Students have to complete the table below:

1. In which country was their actual exchange rate on July 2013 closest to their Big Mac exchange rate?

2. Which country’s currency is suggested by your calculations above as being
a) the most undervalued against the dollar, and
b) the most overvalued against the dollar?

3. What factors could have an influence on exchange rate values on a given date as shown in the table above.

4. In which country was their actual exchange rate on July 2013 closest to their Big Mac exchange rate?

Categories: Exchange Rates Tags: ,

## A2 Revision – Nominal GDP per capita v PPP per capita

Our material well-being
• The standard of living is simply a measure of the economic or material welfare of the inhabitants of a country, a region or a local area.
• The baseline measure is real national output per head of population.
• Real income per capita is an inaccurate and insufficient indicator of living standards

Per Capita National Incomes
National income data can be used to make cross-country comparisons. This requires:

1. Converting GDP data into a common currency (normally the dollar or the Euro)
2. Making an adjustment to reflect differences in the average cost of goods and services in each country to produce data expressed at a ‘purchasing power parity’ standard

Data on per capita income based on a country’s total personal income are rarely available. Thus, the Gross domestic product (GDP) is more commonly used. However, the total personal income is generally lower than the gross domestic income.

A list of the top ten countries, and the lowest-ranking country, by GDP per capita (in terms of purchasing power parity – PPP – and nominal values) for the year 2010

Problems of accuracy:
Officially data on a nation’s GDP tends to understate the true growth of real national income per capita over time e.g. due to the expansion of the shadow economy and the value of unpaid work done by millions of volunteers and people caring for their family members. There may also be errors in calculating the cost of living

The scale of the informal “shadow economy” varies widely across countries at different stages of development. According to the IMF, in developing countries it may be as high as 40% of GDP; in transition countries of central and Eastern Europe it may be up to 30% of GDP and in the leading industrialised countries of the OECD, the shadow economy may be in the region of 15% of GDP

Categories: Growth Tags: ,

## Spain hold onto Euro

Having arrived in Spain (Mallorca) last night just before the euro final I could not post something about football – the Spanish know how to celebrate. Spain showed their class and are an exceptional team to have won three major tournaments in the last four years. Some have likened them to the Brazil team of 1970.

In keeping with Spanish football, I came across Simon Kuper, co-author of Soccernomics, on the eZonomics website by ING. One particular part of the site focuses on soccer – Cup-o-nomics – in which current issues in the sport are related to economics. With the Euro 2012 Championship on he has written several articles about players. managers etc.

In July 2007, the Spanish striker Fernando Torres moved from Athletico Madrid to Liverpool. Torres commanded a salary of £90,000 (NZ\$175,500) a week at Liverpool, equivalent to £4.6m (NZ\$9.1m) a year. Interestingly enough this was a salary cut as at Athletico he was on an annual salary of €8 million (about NZ\$10.5 million). However within a year of signing for Liverpool the purchasing power of his income decreased for the following reasons:

1. The pound depreciated against the euro (hard to believe now) by around 20%. Most foreign players tend to send home a lot of their salary and therefore Torres needed to use more pounds to buy euros.
2. After 2008 and the financial crisis the UK experienced over 5% inflation which again would have lessened the purchasing poser of his income. Most soccer players are on a given salary for the duration of their contract and therefore don’t have their income indexed to the CPI or cost of living.

Even all this said, Fernando Torres is probably not too worried about exchange rate fluctuations or inflation rates when you look at his salary and the season he has just had with Chelsea and Spain.