Sumary of What the Big Mac index says about the dollar and the dong:
- Jul 24th 2021HONG KONGWHEN The Economist introduced its Big Mac index 35 years ago, the ubiquitous McDonald’s hamburger cost just $1.60 in America.
- But the index was intended not as a shopper’s guide to burgers but as a tongue-in-cheek guide to currencies.
- In principle, the value of a currency should reflect its power to buy things, according to the doctrine of “purchasing-power parity”, a term coined by Gustav Cassel, a Swedish economist, in 1918. Since 69,000 dong and $5.65 have the same power to buy a burger, they should be worth the same amount.
- In April it confirmed that Vietnam was one of a trio of trading partners, alongside Switzerland and Taiwan, pursuing “potentially unfair” currency practices, based on three tests of its devising.
- It also said it would gradually let the currency fluctuate more freely and it would be more open about its interventions in the currency markets.
- Lest the Big Mac index contribute to Vietnam’s difficulties, it is worth pointing out that it is common for poor countries to seem cheap relative to rich ones in any simple comparison of prices.