Home > China, International Trade > Big Macs and Undervalued Yuan

Big Macs and Undervalued Yuan

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If the Big Mac index is right, we should be heading for an exchange rate closer to 3.66.

That would be fine with me: my income is in RMB and I have a house payment in USD. For me, an appreciating RMB is good.

For some reason, most young Chinese I talk to about this don’t think it would be good for them. That’s in spite of the fact that their incomes are in RMB, and a big chunk of what they want to consume (travel abroad, higher degree program abroad, anything made of copper, steel, aluminum, beef, etc.) has a big USD component in the price.

I find it odd that they think a stronger yuan would hurt them, unless their families are exporters. In fact, it would make many of them better off.

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Categories: China, International Trade
  1. B
    February 23, 2013 at 7:31 pm

    Obviously most of china’s income comes from exports and as such many are not willing for a shift in job.
    U, sir are thinking of your end and how its of benefit you

    • Kelcy Hahn
      February 25, 2013 at 2:39 pm

      First, most of China’s income does *not* come from exports. Check the numbers before you say something is “obvious” that is just your personal observation. A quick check could have told you that only about 30% of China’s income comes from exports.

      Second, you are correct that a stronger RMB benefits me. I said as much in the post, so no secret there. But I am not the only one in China who would benefit from a stronger yuan. Many young Chinese workers would, too.

      It’s simplistic to think that currency changes are “good” for a country or “bad” for a country. In fact, currency changes benefit some people and hurt others, and to varying degrees. I just want my students to think with more complexity about these issues–not just repeat what others say.

  2. McOsoo
    May 9, 2013 at 8:20 pm

    Hello Mr. Kelcy, i have come to love the way BIG MAC principle.
    first they use this principle to determine undervalued and overvalued currency.
    second they use it to determine ppp of the countries in question using USD as the base currency, this is a very simplified and very intelligent idea of looking at things. The only question i lay on them is, countries put weight on things differently, let say china has a weight of 40% in food and the remaining % is split in other sectors, this means that, food is much important than other stuff with low %. If this true, then they should use another commodity apart from food to see if the principle still holds. Otherwise they have smart brain, its a far fetched idea

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