from Geo-Graphics

CFR Mini Mac Index Suggests ‘Currency Manipulation’ Charges Trumped Up

February 7, 2020

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

The “law of one price” holds that identical goods should trade for the same price in an efficient market. But how well does it actually hold internationally? The Economist magazine’s Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to measure the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.

But the law of one price assumes there are no restrictions on, or costs involved in, the movement of goods, and Big Macs travel badly. So in 2013 we created our own Mini Mac Index, which compares the price of iPad minis across countries. Minis are a global product that, unlike Big Macs, can move quickly and cheaply around the world. As explained in the video here, this helps equalize prices.

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As shown in the graphic at the top, the Mini Mac Index suggests that the law of one price holds far better than does the Big Mac Index. The Big Mac shows the dollar overvalued against most currencies, by an average of 35.2 percent (a whopper). By contrast, the Mini Mac shows the dollar slightly undervalued—1.8 percent on average (small fries).

The Mini Mac therefore offers no support for the Trump administration’s controversial new regulation allowing companies to pursue tariffs against foreign competitors benefiting from “currency manipulation.” We have long believed most such charges to be trumped up, a fig leaf behind which to pressure countries to change policies having little or no relation to currency.  The best example is Treasury’s targeting of Germany, Italy, and Ireland—eurozone countries with no monetary policy.

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