I love this. So.... going to Booth, we talk a lot about the economy because apparently there's been a lot of people who went to my school that were into that sort of thing. I suppose it's kind of important or something so they've developed a lot of algorithms, equations, general theories and sometimes interpretive dances to measure, quantify, analyze, track or gauge the way the economy is moving, trending, changing, increasing and decreasing. It's been an exhausting tenure for the economists at my school-- they've been busy.
But the problem is, I've learned, that the economy doesn't really like being measured. I mean, there's a lot of variables! You have to look an employment (or lack thereof as the case has been recently), population (we're not a 100% on how to measure this yet-- is it working age? All? How do we count for people who've moved back home to their parents? How about the parents that are now living with their kids? It depends who you ask apparently), how we define the poverty line, where in the nation or the globe the people are located, and how we define "standard of living".
One tried and true measure that has been used for a long time is the CPI (Consumer Price Index) which is basically a baselined measure of how much stuff (predetermined, set, unchanging stuff) people can buy with a set amount of money. This supposedly helps us benchmark so we can figure out inflation in a more accurate way. We recently changed the way we define it, but that's another story. There's a lot of qualms about why the CPI is inaccurate , but we really didn't have anything better. Until now.
So The Economist (I'm catching up on my back copies of The Economist, ok? Don't judge me, I just finished my finals and I had a lot of Bones to catch up on) made up their own index that they call the Big Mac Index. Follow me. Also, if you don't know who the guy above is, you really need to get out more. Or less. Or live in the 50s. Whatever, you're choice.
The Economist made it real easy. They based it on a symbol of Americana-- a global behemoth that's expanded to the far reaches of the world-- that can be found anywhere if you're hungry enough. The Big Mac Index is actually based on something real (!!)-- the PPP (theory of Purchasing Power Parity) according to which prices and exchange rates should adjust over the long run, so that identical baskets of tradable goods cost the same across countries. Their "basket of goods" in essence is only one thing-- a big mac. So for those that are worried about currency wars (countries purposely downplaying their currencies to give their exporters a boost in a world anxious about recovery), rest assured knowing that a Canadian burger costs $5.39 compared to the average price of about $4.37 in the US. In Mexico, it's only $2.90, suggesting the peso is 33% below its long run value relative to the dollar. The index actually suggests that currencies are overvalued in Norway, Switzerland and Brazil. The euro, in contrast, is now around 12% too expensive relative to the dollar, which could be dangerous as an indication of minimal boosting the ailing euro area. Compare this to China, which has barely moved toward fair market value, most likely due to meddling by government/banks and government banks who rely on exports as their lifeline. Big Macs can't be wrong!! Mac attack anyone?
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