Big Mac Index Case Study

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Why is the USD weakening simultaneously with the economic skyrocketing?
The artificial disappointment with soaring inflation helps US producers to export their goods cheaper
The Big Mac Index indicates the inconvenience which causes the high US Dollar
Let's imagine a currency which has a great economy behind it, the economy is doing well, the unemployment rate is at the 16-year low level, the local stock market is soaring to record highs and the central bank has hiked the interest rates thrice during last 10 months. It seems great, and it makes us believe that this currency would surge as long as there is not any great depression. At first glance, it is rather unbelievable that during the above-mentioned period the national currency can touch its 15-month lows without any intervention.

So, let's forget about the illusion and let's come back to reality. The described situation refers to the USD. The US economy is doing very well, but the USD is heading to the opposite direction.

Firstly, the market was acting on behalf of the USD, as the rate hikes supported the US Dollar Index to increase from 95 to 103 points during the October-January period. US Dollar Index Chart | USD Index Streaming Chart everything was pretty well. The USD was soaring against all other major currencies, the Fed Reserve had a great outlook for the US economic growth and promised more and more interest rate hikes, the new president vowed tax reforms combined with drastic tax cuts, the stock market gave up its fluctuations and skyrocketed to new historic highs and so on... It seemed that the USD was unstoppable until President Trump warned the market: "the strong dollar is killing us". He emphasized the importance of competitiveness of exporting goods by saying: "Our companies can't compete with them now because our currency is too strong. And it’s killing us," Trump told The Wall Street Journal, referring to competition from China. Even before this speech the fact that Trump couldn't afford high USD was obvious, as one of the cornerstones of his economic plan was to persuade the US companies to come back to their mainland, to produce their products inside the US borders, to provide lots of jobs for the unemployed labor force, to provide the industrial and manufacturing development for the country, meanwhile, the high USD would make the US goods more expensive in foreign countries. In this condition the US producers would never agree to invest in the USA, as the labor workforce is very expensive there, the material is expensive as well, the taxes were relatively high and even the national currency was headed to new high levels. In this situation, the new investors would never benefit. There are only a few people who consider Trump's words as pivotal for the USD but as there was interesting coincidence among the words and the currency's reversal period, thus the fact must be explored carefully. Obviously, they were forced to do something which could stop the surge of the USD. What they did, was the creation of an illusion about the soaring inflation, and pledged to hike the interest rate rapidly to curb the inflation. Nowadays market allows the central bankers to manipulate the market without any fundamental base. Afterwards, the inflation started to grow at a slower pace. The artificial illusion about the skyrocketing inflation collapsed and made disappointment in the market, the market players stopped to believe the possibility
…show more content…
In the USA average price of a Big Mac in July 2017 was $5.30. The 1st destination for US exporters is the European Union, a Big Mac is available for 4.47 $ there, which means that you should pay 15.8 % less. The second is Canada, where you can buy a Big Mac for 4.66$, which is 12.2 % cheaper than in the USA, the third importer of US products is Mexico, where the Big Mac's cost is 2.75$, it means you have to pay 48% less than in the USA, the 4th largest export destination is China, where the Big Mac would cost you 2.92$, which is 45% cheaper than a Big Mac in the USA. These statistics indicate the great overvaluation of the US Dollar against other major currencies, which means that it has a great disruptive effect on US

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