Beefing up the argument

Date: 2015-10-07; view: 521.

An alternative way of defining the “fair” value of a currency is purchasing-power parity (PPP): the idea that, in the long run, exchange rates should equalise prices across countries. The Economist's Big Mac index offers a crude estimate of how far exchange rates are from PPP. Our January update found that a Big Mac cost 48% less in China than in America, which might suggest that the yuan is 48% undervalued against the dollar. But by this gauge, the currencies of virtually all low-income countries are undervalued, since prices are generally lower in these countries than in rich ones . This is the basis of the Balassa-Samuelson theory which holds that average prices will be higher in countries with higher productivity (ie, high GDP per head), because higher wages will push up prices in labour-intensive goods and services. This implies that it is natural for China's exchange rate to be below its PPP, but as it gets richer and productivity rises, its real exchange rate should rise.

PPP is a long-term concept. However, the relationship between prices and GDP per head can be used to estimate the short-term fair value of a currency relative to others. Using a simple model, which adjusts the Big Mac index for differences in countries' GDP per head and relative labour costs, gives the result that the yuan is now less than 5% undervalued.

A new study by Yin-Wong Cheung, Menzie Chinn and Eiji Fujii arrives at a similar result using World Bank price data across the whole economy. Previous assessments of such data had found that the yuan was around 40% undervalued. But the latest price surveys have raised the estimated price level in China (and so reduced GDP per head measured at PPP). The authors conclude that the yuan was 10% undervalued against the dollar in 2006, which means that it might now be close to parity.

The evidence that the yuan is significantly undervalued is hardly rock-solid. It probably is still a bit too cheap, and it would certainly be a mistake for Beijing to allow it to fall, not least because this would risk a protectionist backlash from abroad. In the longer term, the yuan needs to keep rising against a basket of currencies. But for now, some of the accusations being thrown at China are wide of the mark.

Find in the text the equivalents of the following: справедлива вартість; приблизна оцінка; трудомісткі товари та послуги; вартість валюти щодо інших валют; скорегувати індекс щодо відмінностей; паритет купівельної спроможності; валюта завищеної/заниженої вартості; неспростовні докази; валютна корзина.

Jan 26th 2009;
From Economist.com

The dollar's recent revival has made fewer currencies look dear against the Big Mac index, our light-hearted guide to exchange rates. The index is based on the idea of purchasing-power parity, 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 $3.54, its cost in America, the currency is dear; if it is below that benchmark, it is cheap. There are three noteworthy shifts since the summer. The yen, which had looked very cheap, is now close to fair value. So is the pound, which had looked dear the last time we compared burger prices in July. The euro is still overvalued on the burger gauge, but far less so than last summer.

Two pieces of the BBC business news were mixed up. Restore the original messages under the headings “Dollar's reserve status 'is safe'” (text A) and “Brazil to make $10bn loan to IMF”(text B).