The bite of Burger-nomics

2009-02-09 00:00

China is arguably the world’s third largest economy. The Chinese National Bureau of Statistics reports that China grew by 13,5% during 2007, leaving analysts to suggest that sometime during that year Germany dropped to fourth position. China had already overtaken the United Kingdom during 2005 and it now appears that the Chinese have Japan in their sights as they pursue the number two spot.

Current data from the Economist suggests that the Japanese economy is about 31% larger than China’s, meaning that if the Chinese see themselves biting at the heels of the United States then they still have a lot of catching up to do.

With all the talk about China’s political and economic involvement in the African continent, not to mention its position as the manufacturing hub for the advanced world, the South African reader can be forgiven for thinking that the

Chinese are on the brink of becoming the world’s largest economic player. To assuage any worries about perceived Chinese economic domination and the commensurate influence that would bring to global business, consideration should be given to three important points.

Firstly, even if China does continue to grow annually by 10% or more, the number two spot will elude it for quite some time. Japan is unlikely to acquiesce. Secondly, the U.S. economy is more than double the size of Japan’s, and therefore it will be some time before China could conceivably become the world’s largest economy. Thirdly, recent reports from the Economist suggest that current information emanating from China is not as rosy as first thought. That country also appears to be suffering from the current global crisis.

Writing in the Financial Times, John Authors points out that Chinese electricity production, which is closely associated with economic growth, crashed at the end of 2008, suggesting a dramatic reduction in economic output.

Nonetheless, critics of these measures argue that they are only plausible if GDP is measured at current exchange rates, which, given the recent movements of the dollar, euro and pound, appears quite meaningless. The real measure of economic prowess, they argue, is what is termed purchasing power parity (PPP), the belief that a dollar should purchase the same amount of goods and services in different countries.

The Economist has developed a light-hearted explanation of PPP, which it terms Burger- nomics. Using a McDonald’s Big Mac, which is available in about 120 countries, the Economist has established its now famous Big Mac Index. Through this, an attempt has been made to illustrate that the Big Mac PPP is the [exchange] rate at which hamburgers would cost the same in the U.S. as in other countries. Comparing a country’s actual exchange rate with the PPP indicates whether its currency is undervalued or overvalued.

For example, a Big Mac costs about $3,54 in the U.S.. So if a Big Mac’s price in a country is converted into dollars, and that conversion proves to be above the U.S. price, that country’s currency is relatively expensive, such as that of Switzerland or Norway. If the conversion falls below the U.S. benchmark, as in the case of China and South Africa, it is cheap. Some economists argue that if PPP is used to measure the size of an economy, then China is already the world’s second largest economy, being more than half the size of the U.S.

So next time you stop off at McDonalds for your favourite hamburger, pause for a moment and think that although we are plagued with many problems in this country, at least we pay less in relative terms for McDonalds’s global quality.

 

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