Economics class essay!

Date: 4/27/09 Economics 101

The article “Burgernomics says currencies are very dear in Europe but cheap in Asia” refers to the principles of the Big Mac Index and the ramifications that could emerge if certain currencies are undervalued by the International monetary Fund (IMF). In the article, the theory of Purchasing Power Parity (PPP) is introduced, and it showed how the only reason why the PPP existed was to reach a stalemate in world economics, and find a way in which “exchange rates could move to make the price of a basket of goods the same in each country”. According to the article only a hand full of currencies are close to the Big Mac PPP, and from the seven most predominant currencies, only Australia (10%), South Korea (12%) and Singapore (18%) have had an undervalue in their Big Mac prices. The other countries are suffering greatly the overvalued prices of their currency referring to the Big Mac. At this time the U.S. is one of the fortunate countries to have a fair opportunity, and could buy lots of Burgers in the rest of Asia at a justifiable price. Which makes the USA dollar “Sandwiched in between”, and since the big drop in 2002, it “was left close to its medium-term equilibrium level”- said Mr. John Lipsky.

What economists are not taking in consideration is that not all theories are constant and there might be other factors that play a role in the aftermath of these pivotal events in International economics. Just as humans are imperfect, theories can also have their flaws, for example, the PPP may measure where the currencies would end up in the future, but they cannot control what goes on in domestic affairs, such as rents, low wages, and poor countries that have a hard time upgrading their currencies. In my opinion I believe that economists can’t only base their assumptions in old theories because nothing is perfect, and sometimes intuition or experience in a criterion can lead us in the right way. I don’t completely oppose the idea of using theories, because they do have a reason, and economic theories have shaped the way the economy is run today, but relaying too much on one theory is very narrowed minded and may sometimes benefit some but not others. I also agree that it is very arbitrary that only certain countries have the opportunity to prosper economically while others plummet economically. Every nation should have an equal opportunity in the Big Mac Index and their currencies should be balanced out, but since that it impossible, it would at least be rational to address these issues and for the International Monetary Fund to come up with a solution that involves equity.