At the Economist Magazin’s HQ, the alarms bells sound whenever the price of a Big Mac’s rises anywhere in the world (see this link). And there is even a connection currency wars (or is there???).
Now the WSJ chimes in with the ipod-index… – is that a better way to examine the implications of the law of one price?
The Economist Magazine has create a whole industry devoted to sizzling the Big Mac Index. Its unhealthy, as the concept has very little to do with the law of one price or purchasing power parity (see chapter 20). Bloomberg's Billy Bookshelf Index is more informative, but it also lacks a crucial arbitrage component, since the item is not freely traded, but only available from one supplier, who might still price discriminate in different markets. A good visualization of the failure of the law of one price is given by a recent Wall Street Journal article that highlights how the change in the value of the Loonie (the Canadian dollar) is simply not reflected in US/Canadian prices of goods such as DVD players or fridges, causing major headaches for multinational retailers.
