The Big Mac index

Value meal:A guide to valuing currencies against the dollar

WHICH countries has the foreign-exchange market blessed with a cheap exchange rate, and which has it burdened with an expensive one? The Economist's Big Mac index, a lighthearted guide to valuing currencies, provides some clues. The index is based on the idea of purchasing-power parity (PPP), which says currencies should trade at the rate that makes the price of goods the same in each country. So if the price of a Big Mac translated into dollars is above $3.57, its cost in America, the currency is dear; if it is below that benchmark, it is cheap. A Big Mac in China is half the cost of one in America, and other Asian currencies look similarly undervalued. At the other end of the scale, many European currencies look uncompetitive. But the British pound, which was more than 25% overvalued a year ago, is now near fair value.

AP

taken from : Jul 16th 2009
Economist.com

Economic Overview of the Week

Japan’s GDP fell at an annualised rate of 15.2% in the first quarter. The depressing effect on demand of another big decline in exports was compounded by a collapse in business investment.

GDP in the euro area fell by 2.5% in the three months to March, leaving it 4.6% lower than a year earlier. Germany’s economy shrank by almost 7% from its peak in the first quarter of last year. Italy’s GDP fell by 5.9% from a year earlier; Spain’s fell by 3%, while in France, GDP was 3.2% lower. Consumer prices in the euro zone rose by 0.6% in the year to April, unrevised from a provisional estimate. The core rate of inflation, which excludes food, energy, alcohol and tobacco prices, picked up from 1.4% to 1.8%.

The number of new housing starts in America plunged by 12.8% in April to their lowest level since records began in 1959. Despite that drop, sentiment in the sector is improving. The confidence index compiled by the National Association of Home Builders picked up in May.

Consumer prices in Canada fell by 0.1% in April, leaving the annual inflation rate at 0.4%, down from 1.2% in March.

Inflation in Britain fell to 2.3% in April from 2.9% in March. The main downward pressure on inflation came from smaller energy bills and falling food prices.

Malaysia’s inflation rate declined to 3% in April, from 3.5% in March.