from Geo-Graphics

Is Trump Right About the Strong Dollar? Not According to Our Mini Mac Index.

July 23, 2018

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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.

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International Economic Policy

Donald Trump

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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.

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 dispersion of prices is much narrower when measured by Minis.

The Big Mac Index shows the dollar overvalued against most currencies, by an average of 37 percent (a Whopper). The euro is undervalued by 14 percent, the South Korean won by 27 percent, the Japanese yen by 36 percent, the Chinese RMB by 44 percent, and the Mexican peso by 53 percent. This certainly accords with President Trump’s narrative—that the dollar is too strong, that other countries are manipulating their currencies for competitive advantage, and that dollar overvaluation is fueling America’s trade deficit.

In contrast to the Big Mac Index, our Mini Mac Index actually shows the dollar undervalued—though only by 3 percent on average (small fries). The euro is overvalued by 6 percent, the South Korean won by 5 percent, the Chinese RMB by 4 percent, and the Mexican peso by 12 percent. Among America’s usual suspects for currency manipulation, only Japan has an undervalued currency—by 6 percent.

In short, we think the president should hold the relish. His claims don’t cut the mustard.

More on:

International Economic Policy

Donald Trump

United States

Globalization

China

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