Value of British Pound

[Katie]

Fleetwood, I think these days you’re right and the pound isn’t backed by anything. I’d guess the name dates back to a time when the pound was backed by the gold (etc…) reserves of the Bank of England (I know for definite the currency used to be backed, but I can’t remember how long ago that was)

[samclem]

Every six months or so The Economist Magazine surveys the price of a single homogenous manufactured good across 30 or so countries to calculate the extent to which currencies or over- or under valued.

(The homogenous homogenous manufactured good in question happens to be a Big Mac.

What a crock! Using a Big Mac as a standard of whether currencies are over/undervalued is worthless. How about using the price of a 2 bedroom apartment in a medium-sized city? Or the price of chicken/beef/per pound? Or the price of anything that is more comparable than a fast-food specialty item.

[LonesomePolecat]

Okay, can someone explain why the English pound, virtually alone of all the world’s major currencies, is worth more than the American dollar? This isn’t American chauvinism talking here. I really do want to know.

[samclem]

Okay, can someone explain why the English pound, virtually alone of all the world’s major currencies, is worth more than the American dollar?

Probably because the English pound was the most powerful currency in the world from sometime in the 1700’s until the first world war. A pound was worth some $5.US in the 1800’s until about the early 1900’s. But the empire kept slipping and the pound became worth less and less in this century. It slowly declined to its current state.

[dtilque]

*Originally posted by samclem *
What a crock! Using a Big Mac as a standard of whether currencies are over/undervalued is worthless. How about using the price of a 2 bedroom apartment in a medium-sized city? Or the price of chicken/beef/per pound? Or the price of anything that is more comparable than a fast-food specialty item.

Chill, sam. The Economist doesn’t take their Big Mac currency comparison that seriously. If they did, they’d have to add a few items to their market basket. Like say, a Coke and fries…

[Measure_for_Measure]

I knew someone would freak out. Here is a selection of the Economist’s reply, (4/27/2000)

Some readers beef that our Big Mac index does not cut the mustard. They are right that hamburgers are a flawed measure of PPP, because local prices may be distorted by trade barriers on beef, sales taxes or big differences in the cost of non-traded inputs such as rents. Thus, whereas Big Mac PPPs can be a handy guide to the cost of living in countries, they may not be a reliable guide to future exchange-rate movements. Yet, curiously, several academic studies have concluded that the Big Mac index is surprisingly accurate in tracking exchange rates over the longer term.

Indeed, the Big Mac has had several forecasting successes. When the euro was launched at the start of 1999, most forecasters predicted that it would rise. But the euro has instead tumbled—exactly as the Big Mac index had signalled. At the start of 1999, euro burgers were much dearer than American ones. Burgernomics is far from perfect, but our mouths are where our money is.

I’ll note that some of the products that sam described can be interpretted as inputs (chicken, beef) and therefore reflecting a narrower slice of the economy than a final (locally produced) output. For others (rental apartments) they are “non-homogenous”, meaning it is difficult to be sure that a one bedroom apartment in London is really identical to one in New York or Manila for that matter.

Ideally, a basket of goods would be measured. Indeed, a group at the University of Pennsylvania does exactly that. Unfortunately, they come out with their data approximately once every five years. Big Mac sampling, OTOH, is done bi-annually by the Economist, IIRC. Still, I doubt whether any international research departments will be closed due to the Big Mac index.