The global marketplace is an ever-changing space. This is perhaps especially true in the financial sector, where currencies from all over the world come together and are routinely evaluated and reevaluated with every fluctuation of the market. Certain currencies tend to stay fairly stable as far as valuation is concerned and the spectrum within which they move is narrow. For others, the fluctuations are far more significant. In order to look at the value of currencies in an interesting way, two special “indexes” were created. These are the Starbucks “Latte Index” and the “Big Mac Index”.
What are the Latte Index and the Big Mac Index?
The Big Mac Index is the older of the two indexes in question and was created in 1986 by The Economist. It was never intended to be a serious measure of currency valuation, but rather a lighthearted approximation of how global currencies compare to one another. The Latte Index was created by The Wall Street Journal in 2017 and was meant to be taken in much the same fashion.
Both indexes use purchasing-power parity (PPP) to compare what consumer items cost in countries around the globe. The Big Mac Index, as its name implies, looks at the cost of a Big Mac around the globe while the Latte Index takes the price of a tall Starbucks latte into account. The price of both goods in the United States is generally used as the benchmark number, and the prices from other countries are converted to USD for analysis. In this way, it is possible to estimate currencies that are overvalued and undervalued.
Do these indexes have any relevance in global business development?
It is possible to use the Big Mac Index and the Latte Index as tools that provide insight about how global currency might change in the future. That doesn’t mean that it’s a perfect tool that offers precise economic information, of course. But with a discerning eye, both indexes do have a relevant place in global business development. Both offer information about local and global currency in an easy-to-understand way that can help investors or other professionals make calls about where to invest and where to sell.
It should be noted at this point that the Big Mac Index is particularly useful when used in its “altered” format. Dubbed the “gourmet” version by The Economist, this Big Mac Index takes a few different factors into account when making valuations. This includes things like the popularity of the burger in the country in question as well as the price of the costs and labor that went into assembling it. Using this adjusted index, it is possible to gather fairly reliable insight into currency trends of overvaluation and undervaluation. Just make sure to use common sense before making important decisions based off of these PPP indexes. They’re good for superficial analyses to guide more detailed exploration but aren’t the best at providing precise information at first glance.
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