A new theory is percolating through the foreign-exchange markets.
There are many opinions on what one country’s currency ought to be worth relative to others.
And while economists debate the best way to go about this, The Wall Street Journal has developed the Latte Index uses purchasing-power parity (PPP) – comparing the cost of a tall Starbucks latte in dozens of cities around the world.
These prices are then converted to U.S. dollars and compared to the benchmark price, which is a tall Starbucks latte in New York City (US$3.45).
Readers may be familiar with The Economist‘s long-running Big Mac index: by comparing burger prices around the world, it offers a light-hearted guide to whether currencies are at their “correct” level against the dollar.
By coincidence, the average price of a Starbucks tall latte in America is much the same as the average price of a Big Mac.
Obviously the Latte Index is mostly for fun, but it’s also broadly in line with predictions made by the experts.
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