Exchange rates? Now we're talkin'... but where do I get a BigMac?

Cecil's Columns/Staff Reports
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http://www.straightdope.com/mailbag/mexchangerates.html

Finally, a topic that I’ve longed to hear about. Actually, I just woke up this morning wondering about how the hell does one figure out the “purchasing power”.

What I find interesting, is that the PPP seems to be the last and least interesting rate when it comes to exchange rates. I guess when you’re a big company, dealing with millions, you’re not really interested in how many BigMacs you can buy with Lats.

But for small investors and small businesses, this might become larger issue. My company deals with businesses in Mexico and Canada, and I’m interested in finding new business in the U.K. (just want an excuse to travel a bit).

So, to me, purchasing power, is pretty damn important! Because if I offer my services in Pounds, how do I know I’m not under selling myself?

Anyone know of any good URL’s that provide exchange rates and PPP rates?

Thanks!

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  1. In comment to the exchange rate article, just a further note: buying by credit card is an exceptionally smart way to purchase things while traveling. (Finding someone to take it is another matter.) But aside from the protections and guarantees many cards offer, typically when you buy something overseas the credit company will give you the best exchange rate over something like a 3-day span. Saves pennies, sure, but pennies add up.

  2. for currency exchange, i always use http://www.xe.net/ucc/ - currency conversions and historical rates.

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My 2 cents (pun intended): I agree with the previous post about getting the best exchange rates by using a credit cards for purchases. That’s been my experience. Also, not all currencies float. Some are fixed pursuant to government policy, e.g., the Cayman dollar is tied to the US dollar so it is always worth $1.25 US.

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:eek: :eek:

The Economist came up with this semi-serious measure. As far as I’m aware, they haven’t released their calculations since April this year. The last article is now “premium content”. They have however just released a related (and shocking) chart.

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2 brief comments:

  1. Paying by credit card is best because your credit card company can handle the exchange for you, bundling it with other transactions and getting the long-term rate with its overseas affiliate/subsidiary.

If you can’t pay by credit card, next best exchange rate is overseas ATM. Yes, your ATM card may work in a European ATM!

  1. BigMac numbers
    Keep in mind that the price of a Big Mac (or other disgusting American food item) overseas may be affected by deliberate marketing in that country. The Big Mac may be more expensive in a particular country because McDonald’s figures it can get away with it. Since average income per capita is usually lower than in the US, fewer people eat fast food (which is always more expensive than cooking at home). So, the demographic for Big Mac eaters is relatively wealthy faddists rather than harried moms who are too busy to cook. With more disposable income, these faddists are willing to pay premium for a Big Mac.

Empirical evidence: When McDonald’s first opened in Moscow, the line went completely around the small square adjacent to the restaurant. No ordinary proletariat, either. Large number of military officers in dress uniform. Funny to see a senior naval officer in dress blues with snowy white hat waiting 2 hours for a Big Mac!:eek:

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The Purchasing Power index is significantly more than just the “Big Mac”, and the “Big Mac” is mostly a joke. More accurate Purchasing Power indexes are calculated by the OECD, for instance, based on a whole market basket of goods. There are also organizations that calcuate such indexes including costs of housing etc.

Purchasing Power indexes are useful when a company is transferring an employee from one country to another, to help determine whether the employee can maintain a similar life-style. There is therefore quite a market for such comparisons, and consequently there are several organizations that calculate (and sell) them… including the U.S. State Dept.

Infamia, welcome to the Straight Dope Message Boards, with an intriguing first post. The Purchasing Power index is probably not a good guide to what rates you should charge for your services in a different country. You’d really want to look at the market rates being charged in that country for similar services. That is to say, ration of the salary range for a particular position in the UK compared to the salary range for the same/similar position in the US will not necessarily reflect eithe the exchange rate or the Purchasing Power rate. Salaries have to do with supply and demand, as well as tradition/history, in each country.

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Thanks for the welcome. I’ve been quite an avid reader of The Straight Dope from the first time I read it a some years ago.

Intriguing, enlightening, always brainy, sometimes delightfuly absurd, but never turning on its “Bad M****r F*****s” status.

In the early 90’s, flannel and alternative rock was cool. In the late 90’s, computers and nerds were in. Now, having a job and an H&M store down the street, is pretty dope. However, I have never read an article that has neglected what I like to think is its unspoken, timeless mantra,“its just cool to be damn smart, ain’t it?”. The Staff and Cecil don’t play! :cool:

Anyway… I’m a dork and I’m digressing. Back to business…

Are there, by any chance, any free PP indexes out there?

Thanks
EG

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I do see your reasoning why PPI’s might not be useful as a major factor when assessing prices and salaries. Certainly, I live in Washington D.C., so what does it matter if I can buy a Big Mac for the price of a Happy Meal in Mexico, correct?

However, being in the business of web technologies, pricing out projects, concepts, and products, is an all day affair. Knowing the “going rates” is only one factor in what is involved. A great majority is based on our assessed costs.

What’s not clear to me, does keeping an eye how the dollar moves against U.K. in the exchange rates, is a good enough for us.

Does minding the purchasing power then only come into a factor when we decide whether to purchase, lets say, our business cards in the U.K. or in the U.S.? I suppose if we decide to hire another designer, do we then need to be aware of our purchasing power between our gains from U.K. business compared to the business we do here at home? Yes, I think it’ll be come critically important.

The economics of money transfer is particularly interesting as well as overwhelmingly complex. Seems like the more you learn, the less your actually know. :wink:

The fluidity of rates, political controls, and PP indexes… sheesh, is this world better left for the “big boys” to play in? But I’m only further intrigued when it seems to me, at least on a small business level, that not many of us really consider the potential opportunities to do business outside of one’s own border. There must be inefficiences that can be captured with a little bit of research and some balls.

I believe in focusing on one’s strengths is the best way to do business. So while I don’t think I’ll buying any options on currency any time soon, I do think that there’s interesting potential for us to “peddle our warez” across the border. Any good sources of information to look into?

Thanks to anyone, in advance.

EG

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PPPI is only as good and as accurate as the basket of goods. One major flaw is that they usually ignore local substitutes. For example, years ago when I lived in Taiwan the PPPI index was based on the american lifestyle and included corn starch. Well, in Taiwan at the time corn starch was not a staple/normal good but an import, so they calculated an outrageously high price for this one piece of the basket. At the same time, the basket ignored the dirt cheap local potato starch that was commonly used.

PPPI generally rates how it is to live an expatriate life.

I do have an econ degree and worked in the stock markets of tokyo and Hong Kong for 8 years. I read many studies and most of the stock market economists (one handed economists and practical guys out to make a buck and certainly not theoretically inclined), were in general agreement that the Big Mac index was a pretty good rough index. You could get better with an awful lot of work, but for a rough guide the Big Mac Index worked extremely well. YMMV

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Many of the firms calculating Purchasing Power realize the problem with focusing on an expatriate lifestyle (although that’s often their main source of revenue, employers who transfer employees). You can therefore nowadays find many varieties of purchasing power (often strangely called “cost of living”) indexes based on different market baskets.

I’m not aware off the top of me head of any that are free, although the U.S. State Dept indexes may possibly be…?

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infamia said

Without trying to sound churlish, is English your first language? I mean this seriously, as I’m not entirely able to follow some of what you write. PLease don’t take this question to be a slur. It just helps me to understand if I’ve gotten old and am out of touch with current language. :slight_smile:

To answer what appears to be a question that I quoted above:

In the last 2-5 years, the relationship between the dollar and the euro would be a very good gauge of what is going on in the world of exchange rates.

5-10 years ago, you would have had to have been following the dollar/yen ratio. Their relative values was the most important to world currencies. But Japan is no longer a player.

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Samclem,

Yikes!! I’m not so sure I entirely know what I was trying to say there. My apologies for that one. That’s what I get for trying to post at four in the morning.

EG

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Is there any index that uses unspecified food Calories as one of the “products”? That is to say, what’s the minimum amount you’d have to spend to buy (say) 3000 Calories worth of food. That way, you could be comparing rice vs. wheat vs. potatoes vs. poi, or whatever happens to be cheapest in a given area.

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Geez, talk about begging the question. Dex, you shoulda gone that extra mile and wrote about the purchasing power in Latvia. A quick search turns up this factoid: a big mac costs .90 lats.

http://www.itisnet.com/english/e-ce/e-latvia/e-latvia.htm

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Not much of a world traveler, but I do remember the last time I was in Mexico that the exchange rate at the airport differed by 10-15% in the departing terminal compared to the one in the arrivals terminal, and it was only a short walk between the two. Talk about supply and demand.

A related question: someone touched on the subject of foreign currencies with exchange rates which are fixed relative to the USD. I seem to recall that Argentina’s recent financial woes were somehow tied to having a fixed exchange rate (or had they just freed the exchange rate? something like that), but it wasn’t clear to me how this caused them grief. Also, I have this vague notion that if a country adopts a fixed exchange rate, then it must be to their advantage to do so, and thus it is likely to be to our disadvantage. Does this make sense?

Anyone care to educate me? Thanks.

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A good article on the subject. As someone who lived overseas and travelled extensively, exchange rates hold no mysteries for me. But most folks don’t understand the whole economic concept and feel that America is somehow being slighted because someone else’s currency is “worth” more.

I used to explain it like this: You exchange a dollar in country XX and receive 1,000 lemonskys in return. Good deal, right? But if a cup of coffee in that country costs you 15,000 lemonskys, the deal doesn’t seem so sweet. Conversely, if your dollar buys you only 50 lemonskys, but a cup of coffee is 10 lemonskys, such a deal!

A note about the black market: When the Soviet Union was still a factor in the world, the U.S. State Department had an agreement with the Soviet government to only allow an exchange rate at the embassy of .56 Rubles to the dollar. This was an outrageous extortion on the part of the Sovies and many employees in the embassy would make periodic trips to Frankfurt or Berlin and buy rubles at black market rates of 8:1.

The Americans and the Brits were the only diplomatic entities that enforced this charade. Employees would hold periodic “garage sales” at which they would sell used blue jeans and nearly anything else to diplomats from places like the Philippines for outrageous amounts of rubles. Filippinos could get about 35 rubles to the dollar on the black market in Hong Kong.

An ambassador in the latter days of Soviet rule put a stop to the practice, as he deemed it ‘unseemly’.

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Great article, but I just have a nitpick. Portuguese pluralizes words that end in L differently from Spanish. They usually change the L to an I and add S. The singular for the name of Brazil’s currency is real and the plural is reais.

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stf,

Pegging one’s currency to another country’s currency has some advantages and some disadvantages.

Let’s pretend we’re country A, with monetary unit As. Our outside investors are from country B, with monetary unit Bs. Country B is a stable, major economic power.

If we in A are having massive economic turmoil and huge inflation, we can decide (with various consequences we won’t get into now) to peg our As to Bs. This will encourage people from B to invest in our country, as well as people who trust B’s currency to invest in us.

If we do not peg the currency, no one will invest in our country. Let’s say in 2002, someone from B invests 1000Bs in our country at an exchange rate of 1B = 100A. In 2003, the exchange rate goes to 1B = 1000A due to our inflation. The investor from B now has only 100Bs of his original investment. No return on his investment would cover such a huge change in the exchange rate.

If we peg our currency, new investors are more secure in knowing that their original investment and their expected profits will not be destroyed by inflation. Picking what exchange rate to use (1A = .5B, 1A = 1B, 100A = 1B, etc) is the difficult part. Set it wrong and our country’s cost of labor is too high vs investors in B just keeping their money in B. Set it wrong a different way and local businesses cannot afford imported goods.

However, if it is now many years down the road and our economy has recovered, there will be international pressure to let our currency “float”. This is the pressure China is under now from the US. Let’s say we pegged our currency at 10A = 1B originally, and kept it that way for 10 years while our economy recovered. Now, however, it has recovered so well and we have a lot of outside investors running businesses here.

B now feels that our As are really 5A = 1B, but we are forcing everyone to exchange 10A for 1B. B is upset about this because it gives our goods a price advantage when exported to A. This is based not on a purchasing parity issue, but on a cost of production issue. B is at a disadvantage when importing goods from A. A is also at a disadvantage importing goods from B, but A doesn’t yet need a large enough amount of goods from B to care. These types of complaints are usually an issue when labor is the highest cost of production.

One key thing about pegging a currency: either A must have a TON of Bs and be willing to exchange for As them at the pegged rate, or the other countries in the world have to feel A is stable enough to honor the rate A set. The former allows investors to feel confident they will get their money back out of the country. The latter lets investors know everyone else thinks this is a good bet.

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One thing not mentioned in the article is, if you work for, say, a US firm in a foreign country, you can play the money market to help your pay.

Note: This is AMAZINGLY risky and not recommended. Do it at your own risk

In 2002, I, a US citizen, was living in Australia, working for an Australian division of a US firm. I was offered a permanent job with the US firm, requiring that I live in Australia. I could A) require that I be paid in US$, or B) require that I be paid in A$. (Australia, like Canada, the US, and others, use dollars and the sign for their currency.) No matter what currency I am paid in, my local taxes would be paid in A. US taxes, would, of course, be paid in US$, however earnings made while living abroad and taxed by that local government for US citizens are not taxed up to approximately US$80,000.

In March 2002, the US$/A$ exchange rate was US$1 = A$1.92. Currently (9/16/03) it is US$1 = A$1.51.

Had I asked for a US$100,000 salary, I would have been making A$192,000 when I started. About a year and a half later, I would have been making A$151,000, a net loss in local pay of A$41,000! The net loss would actually have been greater, as I would have had to change the US$ to A$ with a steadily worsening exchange rate (or change A$ to US$ to pay US$ debts). So, basing my pay on a very favorable US$ when I started could have resulted in my having to modify my living style. On the plus side, my ability to pay US$-based bills has not changed.

Had I asked for an A$200,000 salary (an approximation of the US$100,000 above), as of now I would still be making A$200,000. However, my ability to pay US$ debts has massively increased. I went from making US$104,167 to US$132,450.

Just food for thought. Of course, one has to know that the exchange rate is going to change, and in which direction. This is, as a note, a small description of how currency futures work and why some businesses would want them.

n

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Yes, that’s right.

Additionally, Dex slipped in some other details about Brazil’s economic history – namely, the order of the currency denominations, the dates where the changes occured and the number of zeros dropped.

Let’s see…
from colonial times up to 1833 - Real (pl. “réis”)
1833- Mil-Réis (literally, “a thousand reals”). One thousand mil-réis was called “Conto de réis”, in order to avoid the “mil mil-réis” construct.
1942 - Cruzeiro (=1000 mil-réis, or 1 Conto)
1967 - Cruzeiro Novo (= 1000 cruzeiros)
1970 - the “Cruzeiro Novo” was renamed back to simply “Cruzeiro.” No zeros were dropped.
1986 - Cruzado (=1000 cruzeiros)
1989 - Cruzado novo (=1000 cruzados)
1990 - Cruzeiro (nominally equal to 1 Cruzado novo, but this was a really weird reform, in which you still had to use Cruzados Novos for some stuff. Really confusing for us who lived through it, too much trouble to explain)
1993 - Cruzeiro Real (=1000 cruzeiros). Note that this was intended from the start to last for a short time, while the way was paved for the Real. At the same time, businesses were encouraged to deal not in Cruzeiros Reais, but on an accounting unit called URV. The URV had daily exchange rates published by the government and its value was kept very close to the US Dollar. This enabled people to enter contracts without needing to include the expectation of future inflation.
1994 - Real (=2750 Cruzeiros Reais). The odd exchange rate is due to the fact that the Real replaced the URV at a 1-to-1 ratio – that is, the initial exchange rate for the USD in Reais was supposed to be 1-to-1.

In short: there were no zeros cut from the Brazilian currency during the seventies. The eighties and early nineties were a mess. The Real seems to have worked fairly well in comparison – after nine years, the current exchange rate is about 1 USD = 3 Reais. Rock-solid, compared to what we had in the eighties.