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Tuesday, July 10, 2007

McDonbas: Ukrainian Hryvnia 41 Percent Undervalued

This year’s edition of The Economist’s Big Mac Index has a lot to tell about Ukraine.

First published in 1986, the Index relies on the price the U.S. Big Mac as the benchmark for tracking the local prices of the world’s best known fast food item. By simple math, it calculates the purchasing power parity (PPP) for each country and compares it against each country’s official exchange rate.

The resultant burgernomics serves as a country-by-country gauge of consumer prowess and as a guide to who’s who in the global economy. Agreed, the underlying methodology may have its limitations, just as adjustments for price and currency fluctuations have to be made. (A real-time picture requires real-time inputs.)

Still, Ukrainian economists have long considered the hryvnia’s undervaluation a fact of life. Ukraine’s rating of -47 (or -41 if we use more recent data) means that 2.77 hryvnia per U.S. dollar would be more accurate than today’s official exchange rate of 5.05.

As the main beneficiary of this hefty discount, the ruling Party of Regions should partner with McDonald’s in integrating these mouthwatering financials into its parliamentary campaign menu. After all, PRU members top the ranks of those happy Ukrainians who cash in on the robust metal exports powered by a weak hryvnia.

And as cheap laborers, Ukrainians deserve full disclosure of where their Big Mac leaves them. It leaves them in a world of funhouse mirrors: with a McDonbas economy that makes it so damn hard for them to say “I’m loving it.” The Big Mac reality is the missing ingredient in ads like this:

Тільки Віктор Янукович та Партія Регіонів довели, що вони мають досвід ефективно керувати урядом, що досягає результатів! Стабільність, ефективність, продуктивність - ось справжні лідерські якості, яких Україна потребує, щоб покласти край хаосу та знову стати на шлях розвитку!

Only Viktor Yanukovych and the Party of Regions have a proven record of experience in efficient governance that delivers results! Stability, efficiency, productivity! These are the true leadership qualities that Ukraine needs in order to put a stop to the chaos and get back on the development track!
We could argue that the development track in the Regionalist vocabulary refers to the developing world, as can be observed from Ukraine’s position on the Index. Our neighbors include:

Thailand, -45

Sri Lanka, -46

Philippines, -46

Well, that’s hardly surprising since consultants to Yanukovych have a proven record of experience in catering to Philippine leaders.



Anonymous said...

U forgot to mention inflation.

Not only is the hv under-valued but it is being messed up by inflation.


olechko said...

it may sound like a laughing matter, but modern economists look for much more then the meager GDP to measure the country's wellbeing these days

Taras said...

Touché, Luida!

According to the State Committee on Statistics, inflation in June hit a 7-year high, reaching 2.4 percent. Stabilnist peremozhe!:)

Taras said...


Money can’t always buy happiness, just as happiness without money can hardly be found, right?:)

As countries move up the ladder, people’s incomes stop being a pain, giving way to such concerns as a healthy lifestyle, recreation, socialization, safety from crime, environmental pollution, etc.

It’s a macrocosm of Maslow’s hierarchy of needs: Once a need is fulfilled, it no longer motivates. Given Ukraine’s current stratification and income level, one can safely assume that most of Ukraine is way down in the physiological department:(

Further proof comes from UN and World Bank studies:

* By 2014, the total number of HIV-positive people in Ukraine will reach up to 820,400.
* By 2050, Ukraine’s population will plummet by 33 percent, to about 26 million.

Therefore, as of today, in measuring Ukrainians’ quality of life, one should look at the GDP per capita first.

To get a well-rounded picture, one should also examine:
* List of countries by GDP (PPP) per capita, 2006
* Human Development Report 2006
* Mercer Human Resource Consulting Cost of Living Survey 2007;jsessionid=O5K51IZQI10AGCTGOUFCIIQKMZ0QUJLW
* Index of Economic Freedom 2007

Of course, revaluing the hryvnia overnight may hurt the economy. Equally true, if left unchanged, the policy will promote the wealth of the few over the wellbeing of the many.

I hope you enjoyed the lecture:)

Anonymous said...

Well took them awhile to print it but I guess better late then never.
"Real cost of USA dollar in Ukraine makes up 2.71 UAH – The Economist"

The real coast of the USA dollar in Ukraine makes up 2.71 UAH. These research data of The Economist magazine are listed in the analytic report of the Economy Ministry of Ukraine concerning the situation on the money market in June 2007.

“Hryvnia is factually underestimated by 46%. Together with countries of South-Eastern Asia, hryvnias enter into top 10 of the most underestimated world currencies. According to the research, "the real coast of the USA dollar makes up 2.71 UAH”, reads the note.

Taras said...

Bingo! Looks like this year’s Big Mac Index, published on Feb. 1, has finally hit UNIAN:)

In Ukraine’s financial circles there’s some talk of a modest revaluation. We’ll see how it turns out.

Anonymous said...
July 26, 2007
First Deputy Prime Minister/Finance Minister Mykola Azarov has forecast that the exchange rate of the hryvnia national currency will be stable.

Azarov was addressing journalists.

"Currency exchange rate is one of our biggest achievements. It will be stable," he said.

Azarov stressed that many politicians are spreading rumors indicating an impending destabilization of the currency market and are accusing the government of increasing the tax burden on taxpayers.

According to him, these rumors are unsubstantiated.

"Have we increased the rate of any tax by even 0.5%?" Azarov said.

He added that the economy is stable, the population's incomes are increasing, and macroeconomic indicators are improving despite the current political crisis in the country.

As Ukrainian News earlier reported, the National Bank of Ukraine's Chairman Volodymyr Stelmakh recently said that it would be inappropriate to revalue the hryvnia.

Taras said...

Did you notice how the Constitutional Court’s authority has declined amongst the proffessionals? All it took was for the Court to restore public employee benefits, thus outlawing the Cabinet’s budget cuts. Suddenly, the Court is no sacred cow, and the economy is not strong enough, so they say.

I take it the “savings” were earmarked for a “stabilnist” fund to which most Ukrainians were not supposed to have access.