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Monday, March 15, 2010

China's Currency & The Big Mac Index

There have been several articles about how China's currency is being deliberately undervalued as a way to keep China's exports at a high level. By having an undervalued currency China's exports are more competitive due to this cost advantage. The IMF has a report that China's currency is undervalued, but the Chinese government has been blocking it's publication.

A more useful tool I have found for comparing currencies is The Big Mac Index published by the Economist. The Big Mac Index compares the cost of the Big Mac in different countries. Per the index, China's currency is undervalued by 49%. Paul Krugman uses 20 to 40%. Other countries that are competing with China, such as Taiwan, Thailand, and Indonesia also have undervalued currencies. Krugman also has a interesting technical explanation on why it does not matter if China starts to sell it's US treasury holdings - China's Water Pistol - Paul Krugman Blog

Another good article that mentions the IMF and China - China Uses Global Trade Rules to Its Advantage - NY Times.

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