An illustration of the note The Economist updated the Big Mac Index
As it happens every six months, in mid-January and July of each year, The Economist updates the “Big Mac Index,” which estimates The extent of alignment or deviation with respect to the dollar are the currencies of twenty countries that trade with the United States, including Argentina.
The index, created by the British Journal and published since 1986, is based on the theory of “purchasing power parity”, according to which the “correct” exchange rate between two currencies in the long term should be the one that allows, in one currency or another, to obtain the same basket of goods and services. .
The Economist chose Big Mac to build its index because it is a relatively homogeneous good and easier to compare than the basket of goods and services.
The Big Mac, of the McDonalds chain, the symbol of globalization, was chosen as a benchmark for being a relatively homogeneous product (roughly the same components and similar service), easier to compare than a “basket” of goods and services, which includes more complex calculations and details.
The price of a Big Mac surveyed in four cities in Argentina shows an average of $ 320, versus the $ 5.66 it average cost in the US. To equalize the price between the two countries, the dollar should be worth $ 56.54 in Argentina, well below the official exchange rate of $ 85.37 at the end of December, and even lower than the free rate, at $ 159 for these hours. As a result, the Argentine peso is “undervalued” at 33.8%, which is the extent to which – according to the index – the dollar should depreciate.
The conclusion seems strange if we take into account that the financial and free dollar costs much more, not less than the official amount, but we must not forget that Argentina is today, in terms of income, prices and currencies in other countries of the world. , Effectively “abandoned” and that there is pent-up inflation through price controls, semi-frozen services and a very strong recession that has not prevented, however, it has exceeded 36% annually in 2020.According to the Big Mac Index, most currencies are undervalued against the dollar, including (in blue) the Argentine peso.
Another factor that makes the comparison relative is that the Big Mac index for Argentina has become less represented since the then Minister of Commerce, Guillermo Moreno, Applied a lock on the local price of the product, which the chain’s website started to make less clear, preferring to highlight other items whose prices did not re-occupy Moreno as much as they did not affect the index, which also has its complications in India where Maharaja has no mac meat, Although – says The Economist – “it’s steady enough” to be included.
A series on Argentina between 2000 and 2020 also shows that according to the Big Mac Index, the Argentine peso was undervalued for most of the twenty-first century, except for a small period in the first phase of the exchange rate that began at the end of 2011. Government Christina Kirchner And it was preceded by the devaluation that was implemented Axel Kisilov. A simple indicator like the Big Mac can’t capture much detail about the local economy, but it reveals its extreme moments.
Biden and the Dollar
In July, The Economist took advantage of the index to compare the “real size” of the economies of the US and China, beyond exchange rate distortions. This time he refers to the “currency wars” under preparation, indicating that despite the dollar’s weakness since mid-2020, the dollar still looks very “strong”, which would give reasons for the next president of the United States, Joseph BidenTo settle commercial accounts with countries that “manipulate” the exchange rate.The development of the Big Mac Index for Argentina between 2000 and 2020; According to him, the Argentine peso was only overvalued for two years, at the inception of Christina Kirchner’s foreign exchange shares, and undervalued the rest of the time. The maximum value was less than the value after departing from convertibility.
The Economist explains that the US Commerce Department is more concerned with countries that devalue their currency, but the Treasury is more concerned with those that “manipulate” them through government interventions.
Defining these questions is not easy. Sharp monetary shifts throughout 2020, in the midst of the pandemic and the wave of global hyper-liquidity unleashed by the US Federal Reserve to fight a recession, caused the Mexican peso to fluctuate strongly against the dollar while the venamate dong was very stable in the first half of the year, but not in the second half. Mexico was not punished, but on December 16, the US Treasury designated Vietnam a “currency manipulator” and the Commerce Department imposed new rates on it. With the argument that the undervalued dong “subsidized” its producers.
The Treasury has also designated Switzerland as a “manipulator” to intervene in the foreign exchange market, but the Swiss franc has expired and has not been undervalued. In contrast, China was not classified as a “currency manipulator”, but in January 2020, the United States imposed “countervailing” tariffs on many Chinese products despite the fact that according to the Big Mac Index, the yuan, the Chinese currency, is now 2 , 5% is overrated.
According to the U.S. census, in the first eleven months of 2020, the northern country had a trade deficit of $ 283.6 billion with China and a $ 1.576 million surplus with Argentina. It remains to be seen what Biden does out of all this, but he is unlikely to be concerned about “undervaluing” the peso or the bilateral balance with Argentina which, in North American parlance, would qualify as “Peanuts“.
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