Thursday, August 14, 2008

A New Estimate of China's Real Exchange Rate

The Economist has its "Big Mac" Index of inflation and purchasing power parity across nations. I'd like to introduce my "Green Cities" index. Let's see if I can do this arithmetic right. I'll make one assumption that the english version (mine) of "Green Cities: Urban Growth and the Environment" and the chinese version of the same book are of equal quality (perfect substitutes).

Let's go to Amazon for the pricing of each:

English version prices at $17

Chinese version price 20 Yuan

Exchange rate 1 $ = 7 Yuan (source Economist Magazine)

Does Purchasing Power Parity Hold? If the only good you buy is my book?

I sell one english version and have $17.
I exchange this for 17*7 Yuan = 119

I can buy 6 copies of my book there: 119/6. This looks like a violation of PPP.

It looks to me that the true exchange rate is almost 1 to 1.

So I agree with this quote from Wikipedia

"For example, the World Bank's World Development Indicators 2005 estimated that in 2003, one United States dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity [2] — much different than the nominal exchange rate that put one dollar equal to 7.6 yuan."

so for you currency arbitrage dudes, I'm telling you to buy the Yuan over the medium term.