Mac Index and Currency Wars: Can McDonald's Sandwich Prices Help Governments Think About Currency Manipulation?
Despite its recent depreciation , the dollar still looks strong. Using the simple BeckMac index to evaluate currencies, it appears that among the currencies of twenty countries, a trading partner of the United States, studied by the US Treasury, all have made gains compared to the dollar since July of last year. But those currencies, with the exception of the Swiss franc, are still undervalued. This gives the US government that has promised to take "strict enforcement measures" against currency manipulators a lot to deal with.
The BC Mac Index is based on the idea that prices must adjust in the long run, with a basket of tradable commodities everywhere costing the same price. Converting prices into dollars at the prevailing exchange rates enables a judgment of whether a currency is undervalued or appreciated. To avoid the problem of differing goods that people buy in different places, we only compare the price of one good: your Mac McDonald's. The sandwich is not exactly the same across countries: the Indian maharaja of mac, for example, does not contain beef, but is consistent enough. The sandwich in Thailand costs 25% less than in America when it is converted into dollars at the prevailing exchange rates, indicating that the Thai baht is undervalued .
Since wages tend to be lower in poor countries, your Mac sandwich might be cheaper. Therefore, a rate-adjusted index of GDP is used. On this basis, the Thai baht was no longer low compared to the dollar and the number of undervalued currency trading partners decreased to 11 .
Does the BC Mac Index align with the US policy on currency manipulators? It appears that US policy is not looking at the same things that the index rates. Your Mac Index records the results; Meanwhile, policymakers try to punish countries that deliberately devalue their currencies. The US Commerce Department says it will not be tolerant of countries that intentionally devalue their currencies. The Treasury is concerned about manipulating the value of the currencies rather than devaluing them, and is looking for evidence of government intervention.
However, given the fluctuations in the value of currencies during the past year, the BC Mac Index could act as a re-examination of US policy. When the Corona pandemic first spread, investors flocked to the dollar, but the Federal Reserve flooded the markets with liquidity in the opposite direction. According to the BK Mac Index, the fluctuations in the Mexican peso mean that it moved from a 53% undervalued ratio against the dollar to 61% during the first half of 2020. In comparison, the Vietnamese dong decreased by less than 0.5% against the dollar in the first half of the year. the past.
In line with this, Mexico evaded US Treasury and Commerce Department sanctions; Vietnam did not escape. On December 16, the Treasury Department described Vietnam as a currency manipulator, citing huge commodity surpluses that it exports to the United States and their interference in foreign exchange markets. The Ministry of Commerce imposed tariffs on tire imports from Vietnam, on the grounds that the Dong was under pressure to lower its value as a subsidy to domestic producers.
Recent US actions contradict PCMC results elsewhere. The Treasury described Switzerland as a manipulator, based in part on its currency market intervention of nearly $ 100 billion (14% of GDP) in the year ending in June. However, the core indicator and the revised benchmark indicate that the Swiss franc is overvalued against the dollar .
The Ministry of Commerce used the issue of currency value manipulation to justify imposing customs duties on the twisted ties imported from China, used to seal plastic bags. US officials may need to note that after adjusting for GDP, the BC Mac Index indicates that the yuan is actually 2.5% above its true value compared to the dollar. This may be a cause for deeper reflection.
Professor of Economics and Political Science, Kansas State University, USA.