This post comes thanks to the Online MBA Blog. Below is their sharp infographic explaining the Big Mac Index, the Economist’s decades-old measure of purchasing power parity (PPP). I showcased and explained this in a previous post.
It’s a simple concept that every traveller is familiar with, but is lost on protectionist politicians. In countries with lower labor costs, prices are lower. A Chinese person with absolutely no gastronomic scruples certainly pays less than his American or Japanese counterparts for a Big Mac, but has to work much longer to obtain it. When you take PPP into account, there is no significant evidence that China is unfairly devaluing their currency, and if you include labor costs, the Renminbi might actually be over valued.
This issue is going to lurk all over this year’s presidential campaign. Mitt Romney is using the convenient boogeyman to rally up the Sinophobic cohorts in the Republican base, threatening to label China as a ‘currency manipulator’ singlehandedly. The “Evil Chinese Steal You Job!!” narrative is completely false, like most things that 21st century Republicans believe, and it isn’t harmless. Chinese workers mostly aren’t competing with American workers (unless you want a job at Foxconn), they are competing with Cambodian, Vietnamese, Indian, Filipino workers. And if there is a single country that doesn’t use monetary policy to help improve the economy, I would like to see it.