So is the China bashing coming out of the republican party justified? The charge is that China is using their foreign reserves to keep their currency, the Yuan, undervalued. This stimulates their exports by making them cheaper to foreign purchasers. The problem is … according to the Big Mac Index of 2012, this is becoming less and less true.
According to this article, China is giving up some control of it’s currency in order to play a larger role in global currency markets and maybe even vying for the position of international reserve currency. The 2005 Big Mac Index shows the start of this appreciation which paused during the financial crisis of 2008, 2009, and 2010.
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Check out the following chart which was compiled by SocGen and used data from the 2012 Big Mac Index. Apparently the Euro is priced correctly according to the Big Mac Index. That’s pretty interesting considering the turmoil surrounding the Euro. As the article states “The Euro’s problems are not with “valuation”, but with “survivability”.
Is the British Pound a “shadow of it’s former self?” Possibly, if you take the Big Mac Index as an indication. In reality, that actually depend on the goals of the central banks. Sure, the Pound went from 18% overvalued to 4% undervalued in a matter of 5 years, but is an undervalued currency necessarily a bad thing? China has been systematically devaluing their currency, the Yuan, for years in order to increase exports (see the comparison between the Big Mac Index 2007 and the Big Mac Index 2012).
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