Sunday, August 15, 2010

What will your money buy?

Those of in who travel globally can check to see the value of our own currency compared to the dollar, euro, peso, or rand or any other currency throughout the world by visiting the website (  Thanks to a couple of quick clicks we can estimate the cost of hotel room, dinner, or the treasurers we plan to bring home.  

But to get an idea of the relative value of our money, one can consider the costs of a Big Mac or a Cupcake.  The idea is purchasing power parity.  Comparing what something (a Big Mac) costs in ones own currency compared to what the cost of the same item (expressed in your own currency) will be at your destination. 

In 1986, the Economist magazine published the first Big Mac index (  The Big Mac, a signature product of McDonalds is sold in 119 countries providing a wide range for comparison.  It is a simplified way to determine if the relative value of one currency to another. For example as of July 22, 2010 the Big Mac pricing, expressed in US dollars was $2.72 in the US, $3.67 in Japan and $2.67 in Saudi Arabia.

While the best known the Big Mac index isn’t the only item that has been used as a point of comparison.  In 2004 there was the Tall Latte Index, referring to the Starbuck’s drink, and in 2007 an I-pod index appeared.  The most recent?  Cupcakes.  Travel and Leisure magazine ( published a report of the relative cost of cupcakes “By the Numbers Let Them Eat Cake” around the world.  While the sizes were very similar the prices varied widely.  A cupcake that cost (all in US dollars) $3.25 in Los Angeles cost $5.17 in Tokyo and only $2.50 in Amman, Jordan.

Whether you consider these comparisons serious or silly they are as much an indicator of the spread of products around the world as they are of the relative value of one currency to another.

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