How much the dollar has to be worth in Argentina

INFOBAE – According to McDonald’s the dollar in Argentina is very expensive, and the basis is that the Big Mac, its emblematic hamburger, is sold here at a price that converted to dollars is much cheaper than in the United States.

But according to Starbucks the dollar at $25.- Argentinan Pesos is an appropriate exchange rate because the Latte coffee, one of its most consumed products, it is sold here at a price in dollars almost equal to that of the United States.

McDonald’s and Starbucks have several things in common. Among them, they are present in many countries, including Argentina, and are food chains that elaborate their products in a standardized way, with very similar procedures and raw materials.

Taking into account this fact, The Economist created the so-called Big Mac Index, almost 30 years ago, as a guide to determine if the currencies of the countries were overvalued, undervalued or had a fair value. That is, it established a parameter to determine whether the dollar is cheap, expensive or at a reasonable level. The idea of the English publication is based on what is known as the theory of purchasing power parity, according to which the exchange rate must be such that it equals the prices of a basket of goods between two countries.

The Economist simplified the method by reducing the basket to a single good, the famous hamburger, taking as a reference its price in the United States. If the dollar price of the Big Mac in a country is lower than in the United States, this would indicate that the exchange rate is high or, in other words, that the local currency is undervalued. In short, the country is cheap in dollars. Conversely, if the price in dollars is higher than in the United States, there would be a backward exchange rate, equivalent to an overvalued currency that causes an expensive economy in dollars.

With the same logic as what he has been doing The Economist since 1986 with McDonald’s Big Mac, The Wall Street Journal started recently to do exactly the same with Starbucks Latte coffee. With slightly fewer branches than the hamburger chain (27,000 vs 37,000), the one created in Seattle in 1971 has stores in more than seventy countries and a business model that replicates everywhere.

However, the results for Argentina are very different. In the case of the Big Mac, it is selling at $74 ARS, which with a dollar exchange rate of $25 yields a price in dollars of $2.96, much lower than the US$5.28. To match prices, the dollar should be quoted at $14. That is to say that according to this comparison the exchange rate is very high, that is, the dollar is expensive and the peso is undervalued.

With the exception of the Swiss franc and the crowns of Norway and Sweden, according to the Big Mac Index, all other currencies are undervalued against the dollar.


Big Mac Index

Price in dollars at the exchange rate of each country

Source: The Economist

Latte Index

But the Latte Index paints another picture. In Argentina, the Big Latte costs ars$84, which at an exchange rate of $25 equals us$3.36, almost the same as in New York. To equalize the price, the dollar should trade $24.34. That is to say that the Peso would be neither over nor undervalued, but at an adequate level

Price in dollars of Latte Grande at the exchange rate of each country


Source: The Wall Street Journal

Confusion with the indices

So far, what is clearest is that these types of indexes are very simple but can lead to confusion.

Without the flavor or the showiness of a Big Mac or a Latte, there is another index widely used by economists to assess whether the dollar is expensive, cheap, or at a break-even point. Is the Multilateral Real Exchange Rate Index (ITCRM), which measures the relative price of goods and services of the Argentine economy with respect to that of its main trading partners.

The ITCRM rises when prices in local dollars fall and the country becomes cheaper in relation to the rest, and this can happen because the peso is devalued or because, for example, a country like Brazil becomes more expensive in dollars because the Real is revalued.

After the very strong devaluation of the peso in recent weeks, greater than that of the Brazilian real and that of any other currency of countries with which Argentina trades, the ITCRM that the Central Bank calculates and publishes daily it is now at the levels it had at the end of 2015 after the devaluation that led to the lifting of the exchange rate control.

In this new stage of the single market and free of changes, the ITCRM began on December 17, 2015, with a value of 100. With the passage of time, it was delayed and took minimum values of 82 and 84 in May and December of last year. They were numbers that indicated a strong exchange rate backwardness (cheap dollar), although not as much as at the end of the previous government when the ITCRM touched a floor of 73, not far from the point it had reached when the Convertibility broke out.

Launched the run and the devaluation, the 11 of May of this year the index returned to surpass 100 and yesterday was located in 104.

In summary, the current dollar of 25 led the ITCRM a bit above the level it had at the end of 2015 after the initial devaluation that caused the lifting of the stocks.

There is no doubt that the Big Mac Index gives a very distorted signal, while the Latte Index and the ITCRM show that the current price of the dollar is in line with what was the average of recent years.

But nothing makes it possible to ensure that the current price is stable. It is seen that if it were not for the massive sale of reserves by the Central Bank and the intervention of public banks,  the demand would have taken the value of the dollar much higher.

And while it is very likely that devaluation will stimulate exports, discourage imports and make it less attractive to travel abroad, the imbalance of the external sector of the Argentine economy is so great that it is not fixed with a dollar at $25 nor with an even higher dollar but socially and politically intolerable.


Written By Marcelo Zlotogwiazda
Published in Spanish by INFOBAE

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