In any potential legal case against the Chinese Yuan, the measure of its alleged undervaluation is critical because of the necessary demonstration of the benefit criterion in a subsidy context. Moreover, in a CVD context, the countervailing duty must not be superior to the benefit inherent in the subsidy.
In this context, I have always wondered from where the US National Association of Manufacturers (NAM) takes its frequently quoted figure of a 40 percent undervaluation. Yesterday in my classroom, we were examining the Big Mac Index and it strikes me that the undervaluation for the Yuan according to this index turns around 40-50 percent in recent years.
As many know, the Big Mac Index is based on the theory of purchasing power parity (PPP) which says that a dollar should buy the same amount in all countries. Thus, in the long run, the exchange rate between two countries should move toward the rate that equalizes the prices of an identical basket of goods and services in each country. The Big Mac, as a homogenous product consumed in 120 countries, is just taken as a representative of this identical basket of goods.
My guess is that in a potential legal case or in diplomatic consultations, we will hear a lot about Big Macs and perhaps Ipods because there is now an Ipod Index based on the same philosophy as the Big Mac Index!
