Starbucks Index

What Is the Starbucks Index?

The Starbucks index alludes to a measure of purchasing power parity (PPP) that compares the cost of a tall latte in nearby currency against the U.S. dollar in 16 countries.

The purpose of the Starbucks index is to show the purchasing power of every national currency addressed, which is reflected in the cost of a latte in that country in U.S. dollars. For example, a latte that costs fundamentally less in one country proposes an undervalued currency.

How the Starbucks Index Works

The Starbucks index was first made in 2004 by The Economist, a global publication, which offers a printed issue consistently and articles online.

The Starbucks index gives knowledge into what currency exchange rates ought to be founded on the price of a tall latte. It does as such by comparing the price in various countries in U.S. dollars. The theory recommends that a tall latte in one country ought to cost a similar in another country once the exchange rate is applied.

As such, the two currencies are at par when lattes have similar value in the two countries. A currency is thought of as overvalued on the off chance that the cost of a latte is more than the price paid by a U.S. consumer in U.S. dollars and undervalued assuming it costs less. Suppose a tall latte in the U.S. costs $3.50, $4.00 in China, and $1.50 in Thailand. As indicated by the index, the Chinese renminbi would be thought of as overvalued compared to the U.S. dollar, while the Thai baht undervalued.

Purchase power parity allows you to compare pricing between countries with various currencies, despite the fact that it's anything but a perfect measurement metric.

Purchasing Power Parity (PPP)

Purchasing power parity is a well known macroeconomic analysis metric used to compare economic productivity and standards of living between countries. It compares various currencies through a basket of goods approach. It suggests that two currencies are in equilibrium, which happens when the currencies are at par when a basket of goods is priced similar in the two countries, considering the exchange rates between the two currencies.

Relative purchase power parity (RPPP) might be a more accurate measurement. RPPP considers the difference between two countries' inflation rates — or the pace of rising prices — in driving changes in the exchange rate between the two countries over the long run. RPPP develops purchase power parity and supplements the theory of absolute purchase power parity.

Starbucks Index versus Different Indexes

Indexes utilizing different products, like the Big Mac, and comparable Starbucks indexes, utilizing the price of a tall latte, have been made to measure the purchasing power between the U.S. furthermore, different countries.

The Wall Street Journal's Latte Index

The Wall Street Journal compared prices in U.S. dollars in excess of twelve major urban communities worldwide with its own latte index in view of prices at Starbucks areas. As per its last publication in 2018, the WSJ found that a latte cost $3.45 in New York City, $4.24 in Singapore, and $5.76 in Zurich, Switzerland.

The Finder's Latte Index

Online publication Finder likewise has a Starbucks index, which computes latte prices in U.S. dollars in 76 unique countries. The latest index was distributed in 2019. As per the discoveries, a Starbucks tall latte in New York City was the 16th generally costly.

Listed below are instances of the latte costs in U.S. dollars:

• Denmark: $6.05
• Singapore: $4.50
• The United States: $4.30
• United Kingdom: $3.58
• Canada: $3.15
• Brazil $2.43

The study adjusted for the cost of labor and taxes. Northern Europe and Asia were two of the most costly areas.

The Big Mac Index

The Starbucks index depends on the Big Mac Index, which The Economist likewise began, depicted as "a cheerful manual for whether currencies are at their 'right' level."

The Big Mac Index — or Big Mac PPP — is utilized to measure the purchasing power parity between nations involving the price of a McDonald's Big Mac as the benchmark. The Big Mac Index works the same way as the latte index, supplanting the basket of goods with the Big Mac. Albeit the cost of a basket of goods will differ while comparing the U.S. versus another country, the Big Mac is normally a similar price in every country.

For instance, in June of 2021, The Economist reported that the Big Mac cost 3.49 British pounds in Britain, while in the United States, it cost $5.65, which implied an exchange rate of .62 (3.49/$5.65). All in all, the index indicated an exchange rate of .62 British pence for one U.S. dollar. Be that as it may, the real exchange rate was .73 British pence per dollar, and while taking the difference, it suggested the British pound was 15% undervalued versus the U.S. dollar.

Analysis of the Starbucks Index

Applying the comparison or product prices globally as a practical measure of purchasing power can challenge. The indexes don't factor in several factors while comparing currencies, remembering differences for product quality, consumer perspectives, and economic conditions in every country.

Albeit the product inputs and how they're manufactured and distributed is uniform across all countries, both the Starbucks and Big Mac indexes fail to think about differences in the accompanying:

• The costs associated with the labor to staff the stores
• The cost of the storefront
• Extra costs inside the franchise license to operate the eatery
• Raw material costs, including the costs to build the store and the different fixings whenever obtained locally
• Costs to import and obtain any fundamental info goods, like machinery and gear

These factors might influence the price of the Starbucks latte or Big Mac, losing the ratio relative to the cost of the U.S. adaptation of the product.

Features

• The index states, a currency is overvalued when a tall latte costs more in U.S. dollars in a single country and undervalued when it costs less in dollars.
• Purchasing power parity states that the prices of like goods in a single country ought to be equivalent when valued in another country's currency.
• Initially made by The Economist, different publications have made their rendition of the index.
• The Starbucks index measures the purchasing power parity by comparing the relative prices of a tall latte coffee in 16 countries.
• The index has limitations since it doesn't think about several factors, remembering the labor costs and economic conditions for every country.