Purchasing power of the U.S. dollar and renminbi: move over, burgernomics. Here's a real shopping basket.

• Author: Zhang, Zhiqiang

The United States and China are global economic leaders, together accounting for over 40 percent of total global economic growth in the past five years, and each is an important market for the other. Moreover, the Chinese currency, the renminbi, is in the process of appreciation. Therefore, the exchange rate between the U.S. dollar and the renminbi attracts worldwide attention and its proper value has been hotly debated.

As the flows of people, products, and capital between the United States and China increase, it is ever more important to understand the purchasing power difference between the dollar and the renminbi. To help, we carried out a survey in October/November 2007, collecting price data in supermarkets in both New York and Beijing.

Not many surveys currently examine currency purchasing power. One well-known survey is the Big Mac Index, published periodically by The Economist magazine. It calculates purchasing power based solely on a single product, the McDonald's Big Mac hamburger.

The other is the World Bank's International Comparison Program, which calculates purchasing power on nearly one thousand products in about 150 countries. The ICE based on surveys taken every three to five years, covers a variety of products and services, from food, clothing, and footwear to equipment and construction and education and medical care.

The advantage of the Big Mac Index is its high efficiency in cost and time. The data is simple, standard (a hamburger sold in nearly identical form in many countries around the world), and easy to obtain. The advantage of the ICP is its wide survey coverage.

Note that the Big Mac Index and the ICP seem to mark the two extremes in research about currency purchasing power. We have not seen much relevant research on an in-between level so far.

Actually, the Big Mac Index's high efficiency comes at the cost of representativity. The price of a hamburger does not convincingly represent overall purchasing power. For one thing, a Big Mac is probably a high-grade food in developing countries and a low-grade food in developed countries, making the comparability of two "identical" hamburgers somewhat uncertain.

The ICP, however, gains its representativity at the expense of timeliness and high cost. When it comes to market surveys, time is everything. Because prices are constantly changing, information with such an obvious time lag is likely invalid. In addition, unless for the purpose of calculating the PPP exchange rate, larger survey coverage does not necessarily mean better representativity or greater usefulness. For...