06 February 2007

Burgernomics (The BigMac Index) and the real value of Rouble

Burgernomics is based on the theory of purchasing-power parity (PPP), the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. The Economist's "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements—such as rent and labour. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.

Click on the table to enlarge

So it can be seen from the table that a BigMac is sold for 3.22$ in USA (and Turkey) and 1.85$ in Russia. If I keep the BigMac as the sole trading element of the world, the "real" currency rate should be 1$=~15.2 Roubles (compare it to the "actual" rate of 1:26.5).

Another bad news for the dollar earning expats in Russia. Enjoy your BigMacs, while you can...

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