At present, the official exchange rate between UK pounds and US dollars is running at about $1.95 to the pound. However, if we compare the UK and US price of coffee in Starbucks and of burgers in Burger King, the functional exchange rate is $1.00 to the pound, give or take a few percent. Seeing as these organisations have to hire real estate, and pay the local wages, taxes, and overheads, the "coffee-burger" exchange rate of one dollar to the pound is a much more accurate estimate of the actual costs of living in the two countries.10th February 2007
4 comments:
Very interesting! From my recent trip including both the USA and England I would have said the UK 'felt' more expensive! Not scientific though.
Stop trying to do economics David, you know nothing about it.
Purchasing power parity a notoriously flawed measure which has received considerable attention from economists. Try www.oecd.org/std/ppp, http://www.economics.harvard.edu/~krogoff/JEL1996.htm (noting the phrase 'startling empirical failure of the law of one price) or
http://fx.sauder.ubc.ca/PPP.html
David,
I read the Harvard paper and the links. I'm saying that as far as individuals are concerned, the method works well for instantaneous estimates of the cost of living indices. The economists are talking about "prediction for exchange rate movement" which is not what I'm concerned with at all. In any case, as a complex systems specialist I know that economies and other complex driven-systems do not tend towards equilibrium, and the 30+ pages of the Harvard report was wasted effort in my view.
David Murphy,
see the BBC article today
http://news.bbc.co.uk/1/hi/business/7122356.stm
very interesting and not your kind of economics perhaps, but more how individuals experience the value of money.
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