Burgeronomics and the Chinese Yuan (slightly wonkish!)
From the Economist.com linked here we get the latest Ronnie factor, for another voice heard from regarding an undervalued Chinese currency:
So WHAT'S this PPP thingy?
OK - so HERE, the cheapest Big Mac, is where the exchange rate is cheapest or undervalued.
THE KICKER - an undervalued exchange rate means that exports are cheaper and imports more expensive.
OK ... now here's the rub ... to FIX the exchange rate at an undervalued level means that the country must BUY ASSETS in the other country - accumulating the other country's assets.
We have a name for this practice (from way back in Britain's Mercantilist era: A "Beggar Thy Neighbor" policy).
Why? Because the country is just taking assets from the other countries through pricing (or setting the exchange rate).
So WHAT'S this PPP thingy?
Basically - the prices of an urban household's purchases in a country equals the equivalent purchases in another country, when adjusted for the exchange rate.
Therefore, a Bic Mac, which is made the same everywhere (supposedly), THEORETICALLY, would cost the same in every country, when adjusted for the exchange rate.
(PPP is Purchasing Power Parity)
OK - so HERE, the cheapest Big Mac, is where the exchange rate is cheapest or undervalued.
THE KICKER - an undervalued exchange rate means that exports are cheaper and imports more expensive.
OK ... now here's the rub ... to FIX the exchange rate at an undervalued level means that the country must BUY ASSETS in the other country - accumulating the other country's assets.
We have a name for this practice (from way back in Britain's Mercantilist era: A "Beggar Thy Neighbor" policy).
Why? Because the country is just taking assets from the other countries through pricing (or setting the exchange rate).
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