Burgernomics


wealthymatters.com

After 25 years, India has recently made it to the Big Mac Index.The Big Mac Index is a “lighthearted” guide published by’ The Economist’ to compare the currencies of different countries. It does so by looking at the price of a Big Mac burger, which is available in more than 100 countries with an identical recipe. Thus, a Big Mac in the U.S. costs $4.07 whereas in China it costs $2.27, using nominal exchange rates. From this, the index suggests that the Chinese yuan is 44% undervalued versus the U.S. dollar, otherwise the price of a Big Mac would be the same.

This is a simplistic way to demonstrate purchasing power parity, a theory that says that the exchange rate between two countries should move toward “correct” value, which would make the price of a basket of products the same in both countries. But despite being a crude measure, many economists and market pundits pay attention to the Big Mac index.

Thwealthymatters.come July 2011 index, included India for the first time since it was created in 1986.  It shows that India has the most  undervalued currency among 37 major currencies — 53% lower than the U.S. dollar.

The index also shows the purchasing parity exchange rate between the Indian rupee and the U.S. dollar to be just 20.7. In other words, $1 can buy goods worth nearly 21 rupees in India. The actual exchange rate is 44.25 rupees for 1 U.S. dollar.

The Big Mac Index is not without its critics.But the Big Mac Index does capture the big picture.So the next question is how to benefit from this state of affairs?Here are some suggestions:

1.)It’s good to be an exporter from India.

2.)Elsewhere, imported Indian goods might be very good value.

3.)Indian manufacturers enjoy a great deal of protection as imported goods cost more.Also workers enjoy greater job security.Enjoy the luxury but prepare for competition.Keep abreast of  technological advancements in other parts of the world.

4.)Indians pay more for imported goods.India’s major import is petro products.So drive a fuel efficient car.If possible use alternative fuels.

5.)Import substitution is still a good policy in India.Indian’s now have a good idea of what is available abroad.Manufacturing the same thing here cheaper is still a good idea.

6.)Imports from other countries with a currency devalued against the US Dollar might work out cheaper.

7.)Foreign trips to other countries with a devalued currency versus the US will work out cheaper than trips to the US.Purchases in these countries will also be cheaper for Indian travelers.

8.)US investors and NRIs will probably find it cheaper to buy assets in India and to set up production units here.This will lead to economic development with all the attendant advantages of job creation and growth of the markets in India.

9.)India investors will probably find it cheaper to buy assets in other countries with currencies that are devalued compared to the US Dollar.

10.)US based NRIs can become wealthier by remitting their earnings to India.

11.)A devalued currency attracts foreign fund flows and inflation.Also there will be rise in asset prices.So it makes sense for Indians to invest in inflation-proof assets.

 

 

 

About Keerthika Singaravel
Engineer,Investor,Businessperson

2 Responses to Burgernomics

  1. Pingback: China-The World’s Largest Economy | wealthymatters

  2. Barias says:

    THANK YOU!
    DOWNLOADED!

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