Big Max Index and Burgereconomics

Economist Article Link: http://www.economist.com/news/finance-and-economics/21571165-currency-wars-burgers-verdict-bunfight

Recently in IB HL Economics, we have been studying exchange rates and protectionism; in particular we have explored the determinants of changes in exchange rates and discussed the advantages and disadvantages of under/overvalued exchange rates and different exchange rate regimes. The advantage to a undervalued currency is obvious; the exports of an economy with an undervalued currency are significantly aided by their relatively lower prices abroad, which simulates economic growth. However, this comes at a cost to the people importing the goods, who are spending their money overseas instead of supporting their local producers and growing their own economy. The article discusses fears amongst many economists that there are emerging "currency wars," battles between nations to devalue their own currencies to give their economies a boost, a phenomenon that could result in a vicious spiraling price war reminiscent to those seen in the 1930's. The Big Mac Index presents a casual, humorous look at these claims, and looks at how certain economies, such as those of Brazil, India, the EU, and Switzerland, have seen movements in the relative valuation of their currencies, and what might have caused those movements.

The impact this has on my life is obvious; while Thailand is not covered in this article, it is currently significantly undervalued, which means I can enjoy junk food at much lower prices! I'm still not sure if that's a good thing. However, the "currency wars" could be a threat to the economy of Thailand; if other countries start rapidly devaluating their currencies, there could be severe damages to Thai exports. This article provides a fascinating look into the politics of exchange rate manipulation through a simple analogy, and it shows us how the real-world movements in exchange rates closely reflect the theory we study in our textbooks.

Thai Exchange Rate

BangkokPost Article Link: http://m.bangkokpost.com/business/333483

In this article, the Central Bank of Thailand is unwilling to cut interest rates further from 2.75 percent. However, Chairman Ramangkura believes that the differences in the US and Thai interest rates are causing too much appreciation to the Thai baht (since Americans are investing in Thailand due to the higher interest rates, causing high demand which is spurring the appreciation of the baht), and he is supported by economist Mr. Suthiwart-Narueput, who believes that lowering the interest rates is a cheaper way of decelerating the appreciation of the baht, which is important because of the harm that unmitigated appreciation could do to local businesses by hurting their capability to export. However, the central bank and Chulalangkorn University's Mr. Manprasert, think that such a low interest rate could fuel a rapid increase in asset prices and create a financial bubble, and that injecting the baht into the foreign exchange market is a safer means of preventing appreciation. Additionally, changes in the interest rate might not have the impact on investors that Chairman Ramangkura hopes for.

While the manipulation of interest rates is an effective tool at manipulating the exchange rate, I believe that the expense of injecting and then rebuying a currency is not significant enough to resort to interest rate manipulation. Injecting large quantities of the Thai baht is a reliable approach to increasing the supply of it on the market (and thus lowering its price), and does not carry the risk of potentially creating a bubble of asset prices. Changes in an interest rate might also have too slow or too unsubstantial an impact on foreign investors, so I would recommend forgoing the interest rate cut and instead pursuing an injection of the Thai baht into the foreign exchange market.