Posted by Rewan Tremethick on September 8th, 2016.
There are many different ways of assessing the economic health of the country you wish to expatriate to. For starters, you could look at its gross domestic product, which is the total economic output, or wage growth, housing prices, unemployment or government spending. But let’s be honest, checking a country’s GDP is unlikely to be high up on the list of priorities for many budding expats.
It might surprise you to learn that there are some much more relatable ways of measuring a country’s economic health; methods that could make it easier to gauge what your expat life will be like. From Big Macs to takeaway coffees to lipstick, the popularity of plenty of everyday products is claimed to have a strong correlation with economic prosperity.
For the most part, no one using these indexes is claiming that they are hugely accurate. The term ‘light-hearted’ is usually used by their creators to describe their intentions, so here’s a look at the ‘whimsical’ side of economics – you never know, it might even help you plan your expat future.
Invented as a fun way of analysing the relative values of currencies, the Big Mac Index has nonetheless become a widespread and popular measure of purchasing power parity (PPP). The idea is that exchange rates should naturally move towards equalising prices for similar goods and services in their respective countries. So if the Pound is worth 1.32 US Dollars, it should buy 1.32 times as much stuff, or the same products and services in the US should be 25% cheaper; i.e. a Big Mac in the UK should be around 25% cheaper than a Big Mac in the US.
As The Economist itself explains; ‘Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies.’
Using burgernomics, you can supposedly work out whether a currency pairing is undervalued, overvalued, or accurately valued. You can also just use it to make sure you can afford lots of Big Macs when you’ve expatriated, if that’s one of your priorities. The Economist realised the same thing also works with Starbucks lattes.
For an example of purchasing power parity in action, look no further than TD Economics’ recent experiment regarding the price of Nike trainers. According to Mark McCormick, the North American Head of FX Strategy at TD;
‘We use the cost of a pair of mid-range Nike running shoes (USD level) to estimate a simple back-of-the-envelope version of PPP…given the ubiquity of Nike shoes in the global economy we wanted to see what it the cost of shoes told us about exchange rates.’
According to the findings, the shoe index does work quite well in that it corroborates findings from the Organisation for Economic Co-operation and Development’s (OECD) research into currency PPP. It did diverge from other research when it came to the Euro, however, suggesting EUR is 16% overvalued compared to a finding of undervaluation from the OECD. The Canadian Dollar was also found to be overly strong, going against other research. So if you’re planning on expatriating to Europe or Canada you might want to buy all your shoes back home first.
If PPP tells us how much money should be required to purchase a certain item in different currencies, the iPhone index tells you how long you should have to work, if PPP is correct, to earn enough to do so. The idea came from the fact that a lot of so-called ‘cost of living’ indices aren’t really reflective of the country or region they represent. This is because they are usually compiled by companies trying to work out how much to pay executives who expatriate to work abroad. Unsurprisingly these staff are often highly-paid and take their spending habits with them no matter where they go, rather than adopting local spending habits. This is the same as how you may spend more or less on certain products and goods than locals do if you were to live abroad as an expat.
According to a report by UBS, back in the dark days before the iPhone 5 had even been released, ‘Buying an iPhone 4S would take 338 hours of work in Mumbai, based on the weighted net hourly wage in 15 professions. In New York, by contrast, it takes 10 minutes to earn enough for a Big Mac and 27.5 hours for an iPhone.’
If you’re thinking of expatriating to work abroad and want to ensure you can upgrade to the iPhone 7, the iPhone index is a good one to keep an eye on; much more so than the consumer price index or wage growth figures.
Now, from measures of currency strength to indicators of trouble. Coke and Waffle House can both be used to measure negative factors plaguing a country, from political instability in the former case to natural disasters in the latter.
According to Coke its popularity in Africa is such that there is actually a correlation between sales and political stability. Strong sales accompany periods of stability, while instability, such as the violence following the 2008 Kenyan elections, causes a significant slump in sales volumes. This correlation doesn’t work so well in Western Europe or North America, thanks to factors such as higher prices and changing tastes having a stronger influence on sales.
Waffle House, meanwhile, is somewhat infamous for its refusal to shut its restaurants in the wake of a natural disaster. In fact, its stoic reputation is so strong that the US Federal Emergency Management Agency (FEMA) actually uses what the restaurant is offering on the menu to measure the severity of a disaster. A full menu is a good sign and gets the green light, while a grill-only menu indicates a loss of grid power or low food supplies and gets a yellow warning. A shut restaurant gets a red light and suggests things are really bad.
While we don’t tend to have that many natural disasters in the UK, it’s not too dissimilar to the British quip that if DFS ever stop having a sale the country must be in real trouble.
It may seem silly to measure economic health this way, but when you think about it there is not much difference between these indexes and the ones actually used by economists. High-brow publications and economists will use the consumer price index as a gauge of an economy’s health; the current CPI is calculated upon the price of a basket of goods, a basket which includes melon, jam, underwear and music subscription services like Spotify. While melon prices would have to go through the roof to hugely influence CPI on their own, the point is that items like those on this list are being used to measure economic health, just not on their own.
And if we’re talking about universal items used across the world, an Underpants Index is probably a more relatable measure than many official indicators currently in use. Before you scoff, it’s worth noting that the idea was actually initially floated by a predecessor of current Federal Reserve Chair Janet Yellen; Alan Greenspan. Greenspan believed that a dip in men’s underwear sales indicated that economic turbulence was on the way.
By the way, Greenspan was known as ‘the oracle’ because of his ability to keep up to speed with developments in the US economy, making it slightly harder to dismiss his underpants index, or his dry cleaning indicators, as nonsense. So the next time you send something to the dry cleaners, thank the prosperous age you’re living in.
While Googling the comparative cost of pants abroad probably isn’t part of your expat checklist, checking the price of everyday items is important. It’s not just about finding out what you can afford – it’s useful to know what’s on offer. You don’t want to discover that you can’t live without Starbucks coffee or Netflix only after moving overseas to a country where these things are overly expensive, different or non-existent.
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