Benn Steil

Geo-Graphics

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China’s RMB Fairly Valued, Euro Overvalued, According to Our Geo-Graphics iPad mini Index

by Benn Steil and Dinah Walker
May 5, 2014

The “law of one price” holds that identical goods should trade for the same price in an efficient market. To what extent does it hold internationally?

The Economist magazine’s famous Big Mac Index uses the price of McDonald’s burgers around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose. Yet it travels badly—cross-border flows of burgers won’t align their prices internationally.

So last year we created our own index which better meets the condition that the product can flow quickly and cheaply across borders: the Geo-Graphics iPad mini Index.

Today’s update is revealing. Despite the U.S. Treasury’s understandable obsession with China trade, iPad mini prices show China’s currency (RMB) to be fairly valued against the dollar. In contrast, the euro is way overvalued: it costs nearly 16% more to buy an iPad mini in France than it does in the United States. With Eurozone consumer price inflation running at a mere 0.7%, this suggests that it is high time for the ECB to bite the QE apple.

We thank Andrew Henderson for his contribution to this post.

Financial Times: ECB Policy Makers Plot QE Road Map
Wall Street Journal: Draghi Says ECB Still Unlikely to Engage in Quantitative Easing
Feldstein: A Weaker Euro for a Stronger Europe
The Economist: The Big Mac Index

 

Follow Benn on Twitter: @BennSteil
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Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

Post a Comment 3 Comments

  • Posted by Guy de Jonquieres

    Surely, this should be called the Little Mac Index?

  • Posted by Evan

    Where does the 16% figure come from? Once you adjust for the 20% value-added tax (VAT) in France, the difference based on the exchange rate is only about 11%. That might seem like a premium vs the US price, but the difference in purchasing power is even greater. Thus, a Frenchman who wants to buy an iPad has to give up fewer other goods and services to obtain it, making it actually in a sense cheaper.

  • Posted by Dinah Walker

    We are basing our comparison on the newest iPad mini (the iPad mini with retina display). Your 11% figure is correct for the older version of the iPad mini.

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