This month is the 25th anniversary of The Economist’s Big Mac index of purchasing power. Formal Purchasing Power Parity indices measure the cost of a basket of goods, but The Economist’s theory was that a single product, the ubiquitous Big Mac might give equally informative results. Looking at the Big Mac index in conjunction with GDP per head to account for income disparities, should therefore indicate which currencies were overvalued.
For years this was the Icelandic krona, until it lost half its value between end Dec 2007 and end Dec 2008. The index used to suggest that the Chinese yuan was overvalued, but now reckons the valuation to be about right. However, the current index suggests the Brazilian real is overvalued. http://econ.st/pVSOSg. Food for thought. Sorry. Not as bad as the mac-roeconomic pun above though.
I wonder how long the Big Mac might be an effective single product for such an index however – you need something which is pervasive, not likely to go out of fashion, and not heavily influenced by other factors. Water shortages or other environmental concerns (raising beef is very costly in terms of natural resources), and health policies (taxes on fast food) could conceivably raise the price of a Big Mac significantly and variably in different countries.
What might be the alternatives? A Starbucks index has been mooted. But is coffee consumption responsive enough? Takeaway coffee appears to be peculiarly resilient to economic downturns. We’ve all noticed energy bills creeping (shooting?) up but who’d have thought that Britons spend more on coffee than on their annual electricity bill? Research published last month showed that a consumer who spends an average amount on drinks from coffee shops spends just over £450 compared to the typical £424 household electricity bill. http://bit.ly/ogzRnj
Google searches might be a more fruitful source of real time economic indicators, and are readily accessible – searches on “gold” and “estate agents” would reflect consumer confidence. The latter search is apparently monitored by the Bank of England to predict changes in the housing market, a famous leading indicator of economic conditions.
If anyone has any ideas, I (and The Economist) would love to hear them