Big mac is not only sandwich

The tendency, which is attentively observed by the host experts for already a period of s month, is the drop in AZN rate in relevant to the USD. According to the data provided by the National Bank of Azerbaijan (NBA), since 22 July there has been observed an increase with small deviations in the exchange rate of the USD. Thus, if in 22 July the AZN rate to the dollar composed AZN 0.8048 for 1 USD, then already in 19 August it fell to AZN 0.8151for 1 USD. In principle, the oscillation of AZN rate to "the green" for Azerbaijan is a process that is not new and completely usual. And the account with regards to how this rate of AZN is "correct" in relevant to the USD is new and interesting for our society.

The discussion deals with the index of Big Mac or "Burgernomics" - the only method, according to which it is possible to simply and most rapidly determine the true level of different currencies. Visualize that the universal money equivalent will be not the dollar, but the hamburger of Big Mac from McDonalds. As this tasty product is sold in 120 countries worldwide and is produced with one and the same prescription, its cost in the national currencies must reflect the real ratio of these currencies. This measurement of rate ratio is based on the theory of "the parity of purchasing capacity (PPC)". According to this theory, the rates of currency of the countries in the long-term period will approach that the identical goods would have identical costs in all countries during calculation through these rates.

For the first time, the index Big Mac was used in the English magazine "The Economist" in September 1986. Since then, it has been published annually. Although the creators of this method have never added index to the precise economic indicators, it made it possible to substantially popularize the theory of exchange rates, making it more accessible for the understanding of inexperienced public. For Azerbaijan this calculation is new due to the young period of the activity of the network of restaurants McDonalds in Azerbaijan (8 years).

Index of Big Mac for April 2008

The table are brings the significance of deviation of the rates of currencies of 22 countries, a single index for the countries of the Euro zone, and also data with respect to the USA as basis for comparison. Let us more attentively look through table. In the first column there were reflected local prices of Big Mac in different countries, the secondly they all are converted into dollar, while in the third is given the parity rate of currencies, calculated by dividing the figures from the first column into the price of Big Mac in the USA, which is also the exchange rate of local currency to the dollar on PPC. In the fourth column is given the current exchange rate of local currency in relevant to the dollar in April 2008. And finally, in the last column is shown how many percentages is underestimated (-) or is overestimated (+) for the domestic currency with respect to the dollar.

As seen, most underestimated currencies were Hon Kong dollar (by 51.96%) and Chinese yuan (by 51.14%). Accordingly, the hamburgers of Big Mac are cheap there and total nearly $2. i.e., the exchange rates of the national currencies of these countries were underestimated by more than 50 percent. Norwegian krone is the most expensive currency, its rate is than theoretical by 137.2%, most expensive Big Mac was sold there - $8.3.

The price Big Mac in America is the average index of four large cities - Atlanta, Chicago, San Francisco and New York, and at that moment totaled approximately $3.5, including tax on sales. At the same time, in Japan the visitors of local snack McDonalds paid 287 yen or $2.83 for the same sandwich. Thus, on the basis of the calculations of "hamburgeronomics", one American dollar must be equal to 82 yen. Comparing this with the real rate of yen that totaled 101.54 yen at the end of April, it is possible to come to the conclusion that the exchange rate of Japanese national currency with respect to the dollar is understated by 19.24%.

According to our own calculations, Azerbaijani manat is also 11.7% cheaper than it must be according to theory of PPC. "Fair" would be the rate of exchange not at AZN 0.83 for one dollar (official rate as a result of April 2008), but 0.80. What is the reason? Azerbaijani currency is not freely converted, i.e., its price is determined not as a result of purchase-sale in the world markets, but with the direct participation of the National Bank. NB uses the rate of manata as one of the tools of monetary policy.

Certainly, the adherents of similar calculations of "Burgernomics" do not cease to be the object of criticism by many specialists, especially for extreme superficiality in considering the issue of forming rates of currency. True, even the prices Big Mac strongly depend on the indirect factors such as, for example, the amount of duties to the imported beef, the amount of tax from sales and leasing payment for the accommodation of snack, where they are sold. Moreover, the study does not consider real market economy of the countries, including price of oil and other raw markets, which substantially influence the exchange rate of American currency, level of inflation in the countries or average per-capita incomes.

On the other hand, the theory PPC actually predicts the dynamics of some exchange rates in a long-term period. For example, the majority of experts foretold an increase in the united European currency after its introduction in 1999. However, the adherents "Burgernomics" did not believe in an increase in the Euro, because according to the index of Big Mac, the exchange rate of new currency was excessively overstated from the beginning. As a result of the quotations, Euro hopelessly reduced for three years. The experience of the last years proves that this kind of comic index can show invaluable service for forecasting of movement directions of the rates of currencies.

The Economist even makes it possible for itself to sometimes vary the calculations: there are versions of calculation based on the bottles of Coca-Cola, price of a cup of coffee with milk. As it was explained, there is a strong positive correlation between the number of Coca-Cola, consumed per capita of population in the country, and the wealth of this country. But Australian Commonwealth Bank, in its time, estimated relationship of real rates of currencies on the dollar cost of MP3 player of iPod in various countries of world. "Index of iPod" is similar to the index of Big Mac, however, it is even less objective, experts say.