… or at least that’s what a hamburger says.
As every year, The Economist published this week its Big Mac Index and in it reveals that the Mexican peso is devalued 61 percent versus the dollar. This hamburger in Mexico costs 50 pesos (that is, $ 2.22), while in the United States it costs $ 5.71. This operation indicates that the exchange rate ‘should’ be 8.76. “This fact, rather than undervaluation, is a price that reflects more the scarecrow than the good macroeconomic foundations. It implies that Mexico is cheap, that you can invest and consume here and make yourself cheaper assets. The question is who is encouraged by this government that in one of them removes the scaffold while you are upstairs painting, “he says. Manuel Molano, economist at Imco.
The Big Mac Index (which is turning 34 years old) is a survey in different countries to compare the most ‘real’ purchasing power of currencies. And as a stick it uses the cost of a Big Mac in every economy, a nice way to apply purchasing power parity theory.
“Not the whole reason for the ‘apparent’ undervaluation is because of the peso. Most of it is due to three factors: labor costs in Mexico significantly lower than in the US, costs of other inputs – such as bread – also cheaper here and lastly, that in times of global crises such as the current one, the dollar tends to strengthen against almost all currencies because investors leave risky markets and take refuge in the dollar. The strengthening of the dollar has been more important than a depreciation of the peso against the dollar, “he says. Gabriel Casillas, chief economist of Grupo Financiero Banorte.
Another interesting fact about the Big Mac index is that it would serve to demonstrate that the Chinese economy has already outperformed the US.
In 2019, China produced more than 99 trillion yuan in goods and services. The US produced $ 21.4 trillion (trillions). Last year’s exchange rate was 6.9 yuan to the dollar, bringing Chinese GDP to $ 14 trillion. At that size, it was far from US GDP, which totaled $ 21.43 trillion. But using the Big Mac Index, The Economist It is encouraged to measure the entire Chinese economy with the same hamburger: while in China it costs 21.70 yuan and 5.71 dollars in the US, this would indicate that a dollar would have a real price of 3.8 yuan. With this ‘exchange rate’, those 99 trillion yuan equals 26 trillion dollars, which would make the largest economy outperform the US by 2 trillion dollars.
A hamburger may sound little serious to calculate the size of the two powers, but already in 2014 the IMF itself had confirmed that due to its participation in world GDP (also measured in purchasing power parity) China had already surpassed the US, a figure which will surely have its adjustments due to both the trade war and the covid-19 pandemic.
barbara[email protected]
@ba_anderson
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