Price of Big Mac suggests that the high dollar is transitory - IDESA


Report Nº: 79305/02/2019

Price of Big Mac suggests that the high dollar is transitory

Mc Donald’s famous burger is used to compare the exchange rates between countries. With this indicator, the dollar in Argentina appears quite misaligned to neighboring countries. This can be useful to temporarily adjust the external sector but it is still pending to achieve competitiveness in more genuine ways. The dollar was particularly calm at the […]

The dollar was particularly calm at the beginning of 2019. After a severe exchange rate crisis in 2018 and January being a month historically prone to devaluations in Argentina, it was striking that it remained at AR$ 37 with a downward trend. The question arising is what factors explain this tranquility and what will be its future for the rest of 2019.

In economics, the theory of purchasing power parity is often used to explain how the underlying factors operate in the variations of currencies between countries. In simplified terms, the idea is that the exchange rate between two countries should tend to move in the direction of making the same basket of goods to have a similar cost in both countries regardless of the currency used. Under this theoretical idea, The Economist magazine adopts since 1986 the Big Mac hamburger as the basket of goods that would allow assessing the level of the exchange rates.

How is the price of the Big Mac burger in Argentina compared to neighboring countries? Taking information published by The Economist, it appears that between July 2017 and January 2019:

  • In Uruguay, a Big Mac hamburger went from US $ 4.5 to US $ 4.3.
  • In Chile the price went from US $ 3.8 to US $ 3.9.
  • In Argentina, on the other hand, the Big Mac went from a cost of US $ 4.1 to US $ 3.0.

These data show that while in 2017 the Big Mac cost in Argentina more or less the same as in neighboring countries, after the devaluation it became between 30% to 45% cheaper than in Chile and Uruguay, respectively. The changes are explained because while in Chile and Uruguay low inflation and exchange rate stability prevail, in Argentina the strong devaluation was not fully compensated by the increase in prices. While the dollar went from AR$17 to AR$37 (120% increase) the Big Mac cost AR$70 in July 2017 and AR$110 in January 2019 (57% increase).

According to the theory of purchasing power parity, what the price of the Big Mac suggests is that the dollar in Argentina is overvalued. That is why the drop in the dollar in recent weeks should not be surprising and the upward trend in domestic prices should continue. In other words, the price of the hamburger in Argentina is pressing to return to US$4 as in the rest of the region. In the same sense, the price of the Big Mac is warning that the “high dollar” is transitory since inflation will cause the real exchange rate to fall again.

The devaluation corrects the scarcity of dollars by reducing imports and tourism abroad. But fewer impacts must be expected on the side of increasing exports since part of the rise in the dollar was offset by higher export taxes and lower reimbursements (VAT reimbursement for foreign sales) to meet the fiscal needs and because exports require long-term projects that are not viable under conditions as unstable as those generated by devaluations. The adjustment is so socially costly (fall in consumption, investment, employment, real wages) that it is very difficult to sustain it over time. That is why as soon as the balance of payments is equilibrated, the real exchange rate tends to appreciate again generating the conditions for a new cycle that will end up in another devaluation crisis.

The way to break with this perverse logic is to improve competitiveness in more genuine ways. That is, do not expect devaluation to solve competitiveness problems but productivity gains should be generated. For this, instead of putting emphasis on importing less, the emphasis should be put on deploying strategies to export more. This requires a financially sustainable public sector with less tax pressure, better regulations and services aimed at generating export capacities.

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