Currency markets are aimed at fixing the exchange rates between different pairs depending on supply and demand for them, derived from international monetary flows of trade, investment or speculation.
In a globalized world the economies of the countries are very dependent on exchange rates so established and certain market conditions may significantly alter the balance of its currency course. As it is impossible to regulate the market to reconcile the different interests and establish changes that satisfy everyone, it is left to the task of determining exchange rates.
However, it is common temptation of central banks to intervene to support their currencies, as might happen now that the yen has reached highs against the dollar in 15 years , while economic policy instrument that allows gain competitiveness.
From a theoretical and based on fundamental economic criteria view, the Law of One Price states that an identical product should have the same price anywhere in the world, which could be a “fair” system to establish the theoretical changes.
Based on this principle The Economist established in 1986 a curious index: Big Mac IndexWhich determines whether a currency is overvalued or undervalued against the US dollar.
This index is based on comparing the dollar price of a hamburger Big Mac Mc.Donald’s in more than 120 countries where it operates the food chain. Depending on the price differences established what would be the right change for this product will cost the same in any country.
In the last publication of this index at the end of July, we see that the currencies of the Asian countries would find themselves undervalued: China 48%, despite an alleged “flexibility” in the yuan; Thailand 42% … on the opposite side of overvalued are: Brazil 31%, with a higher interest rate to 10% attracts many investors; Switzerland 66%, considered a safe haven currency in times of crisis, and Euro 16%. So respects Japan yen / dollar exchange would be in the full price and although it has recently revalued, according to the Financial Times , could be maintained regarding the discounts have also occurred in the price of Big Mac Japanese.
However, we should not forget that a significant part of the cost of a Big Macdepends on local wages and rents, and therefore the comparison by PPP(purchasing power parity) between countries is somewhat distorted.
Anyway the availability of this type of indicators allows us to observe and analyze the discrepancies between the real and financial economies, and understand a little more the importance played by the exchange rates of currencies in the economic policy of countries or areas common currency.
Related Articles: