Vietnam's expose: The Big Mac way
Trade-wars, currency manipulations, and a burger to reveal them all. I'm lovin' it!
What can a burger do?
A lot more than fulfilling your cravings. It can roughly point out that something is wrong with the currency valuations in a country. Could be a disaster, manipulation or simply a case of wrong valuations. Woah!
But, let’s first understand how currencies came to be valued the way they are valued.
Flashback to the good old days: our predecessors were busy trading food for clothes, clothes for jewellery, jewellery for utensils. This barter system was tiring. How do you know what is worth what and whether items are constantly being overvalued and undervalued?
And so, transactions moved to various forms of currency. Each territory (now, countries) has its own currency. Now, the major function of a currency is to serve as a medium of exchange. Have a common value. How would the individual countries have a common exchange value? What would determine this value? What would the value depend on?
The answer was Gold.
And thus, began the era of the Gold Standard. The amount of gold you had determined the value of your currency. The more, the merrier.
Eg: Assume the US has a total of $100 printed, backed by 50 tonnes of gold.
Similarly, the UK has £1,000 printed, backed by 50 tonnes of gold.
Hence, $100 = £1,000, or, $1 = £10
That’s how exchange rates were determined.
But as economies grew, they needed to print more money, which could not be done if they did not have sufficient gold in their reserves. As gold couldn’t be mined fast enough (takes approx 10 years), the US called for all nations to de-link currency and gold, and mutually decide a standard. With the US as the superpower, the currencies were now linked to the US Dollar. Fluctuations then became a function of mere demand and supply.
Burger and Currency Valuations
What is that one thing that is uniform all across the world?
Whatever you would have thought, a McDonald’s burger would definitely not have crossed your mind. McDonald’s serves Big Macs in nearly 120 nations. And uniformity is something that you can definitely trust McDonald’s with.
So ideally the cost of making a burger across all the nations should be the same. Right? And if the costs are the same, then the price of the burger should also be the same?
Absolutely on point.
So, if you get a Big Mac for $5.65 in the U.S and you get the same burger for 69,000 dong in Vietnam, then it means,
$5.65 = 69,000 dong
Or, $1= 12,212 dongs
And if that does not happen, it means that this could be a sign that something or the other is going wrong.
That’s exactly the case with Vietnam. Currently, $1 can fetch you 23,000 dongs. So if you can get more dongs for the same dollar, it means Dong is undervalued. By as much as 47%!
America’s Treasury department also realized this (though, they don’t use the Big Mac Index to measure such discrepancies. They have their own tools).
But why would Vietnam undervalue its currency and why will the US have a problem with that?
Say a pen costs 46,000 dongs. If the exchange rate were Dongs 23,000/USD, the cost of the pen would be USD 2. On the other hand, if the exchange rate were Dongs 25,000/USD (which means Dongs becomes cheaper), then the cost of the pen would be USD 1.428.
You see? If Dongs become cheaper, for the same pen, a foreigner will have to pay fewer Dollars to buy it. And that’s exactly how Vietnam had been benefitting.
Because of the trade wars between China and the U.S, Vietnam had been taking away a significant chunk of the exports to the U.S. Its goods’ trade surplus with the United States jumped 25% in 2020 to $69.7 billion. Now, if Vietnam manipulates the exchange rate, by buying or selling USD it will have an unfair competitive advantage.
So when the U.S raised red flags, Vietnam’s central bank agreed to “improve exchange rate flexibility over time” so that Dong reflects the real-world economy and the markets.
Never thought a burger could influence monetary policy, eh?
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