Purchasing power parity, or PPP, is a simple idea with a tongue twister of a name. When two countries have PPP, a basket of goods costs the same amount in both countries after the exchange rate has been factored in.
The Economist developed an entertaining measure of PPP. It’s called “The Big Mac Index.” The index doesn’t measure a basket of goods. It simply considers the cost of a hamburger in 120 countries around the world. The index was updated for January 2018 and showed burger costs varied when translated into U.S. dollars. For example:
In Switzerland, a burger costs $6.26
In United States, a burger costs $5.28
In the euro zone, a burger costs $4.84
In Britain, a burger costs $4.41
In China, a burger costs $3.17
In Russia, a burger cost $2.29
The Economist reported:
“If the local cost of a [hamburger] converted into dollars is above $5.28, the price in America, a currency is dear; if it is below the benchmark, it is cheap. The average cost of a [hamburger] in the euro zone is $3.95, or $4.84 at the current exchange rate. That implies the euro is undervalued by 8.4 percent against the dollar.”
Overall, PPP is better aligned across the globe. One reason is the improving health of world economies. China remains the most undervalued currency among wealthier nations. In emerging markets, like Russia, currencies remain undervalued relative to the United States.
PPP provides economists with an apples-to-apples measure for comparing the wellbeing of countries and consumers.
Kevin Theissen is the owner of Skygate Financial Group in Ludlow.