Tall Latte Index

by Volker Weber

The Economist has been pondering a new idea:

What can the price of Starbucks coffee, now served in as many as 32 countries, tell us about exchange rates? Readers may be familiar with The Economist's long-running Big Mac index: by comparing burger prices around the world, it offers a light-hearted guide to whether currencies are at their "correct" level against the dollar. Given the dollar's recent plunge against the euro and growing complaints that China is unfairly holding down its currency, we cannot resist testing whether a Starbucks "tall latte index" reaches the same conclusions as our Big Mac index. Both are based on the theory of purchasing-power parity (PPP). This says that, in the long run, exchange rates should move towards levels that equalise the prices of a basket of goods and services in different countries - ie, a dollar should buy the same everywhere.

As a traveller I now find it quite interesting that the Euro seems to be overvalued by as much as 33% against the Dollar. This is good for my travel, but bad for our Economy.

Comments

i'm currently stationned in reykjavik for a month, and, as expected, prices are 2-3 times what i'm used to back home in canada; aside from the simple fact that iceland has, among other things, the most expensive bigmac in the world ;-), looking up apple products just made my jaws drop: base US$299 15gb ipod here is 45,505 kr, which is roughly US$647 (the price, in canada, for the same model is CDN$399, which is already more expensive than simply taking the daily exchange rate from the US price). then again, a much bigger travesty is the price of beer here ;-)

alexei, 2004-01-17

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