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Big Mac burger index and S. Korean Won

My mind has been dabbling in a bit of economics, just trying to understand the subject better. I’ve mentioned before that currency valuation is no longer tied to how much gold the government has, although gold always will be valuable due to its rarity (finite number of the element in the world) and malleability, which means it can be easily melted into jewelry if there is such a demand. So, currencies like a dollar is used as a means to purchase services or goods. Thus, it is important to know how much of a value one dollar can buy. It can be a little difficult trying to grasp of what a dollar can get you for, so one way to measure this is the fun Big Mac index.

Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

and the link to the Big Mac index.

The main purpose of the index is to make it easier to grasp valuation in different currencies than reading exchange rates. At first, when I looked at the index, ofc, I thought it was amusing to use Big Macs but it’s logical because it is sold in about 120 countries and McDonald’s is a highly efficient business. Each burger and french fries have to taste the same and the way they cook them is same too. So, it’s a good way to compare prices of those burgers in different countries. My second thought was whether if it is accurate? this was just published.

(G20) Korean won 2nd most undervalued unit among G-20 currencies: data

Now, onto the Big Mac index – ‘Big Mac Index’ Finds Korean Won Undervalued

So, it turns out that the Big Mac index is accurate after all, almost dead even at 18 percent below.

One reason a dollar is the most popular currency in the world is because of how much GDP is produced every year at $14 trillion dollars in America. So, if you have $3.15 in your pocket, you can buy a Big Mac in any state out of 50 states. Dollar is that good.

You may ask why do they differ in the valuation? Well, there are many factors but in the perfect world, you would want to reach the maximum equilibrium between demand and supply. If a big mac is priced higher, then it could be that they don’t have enough burgers to meet the demand, thus priced higher. In South Korea’s case, I’m not too sure why it’s undervalued – I don’t think it has to do with the over-supply of burgers – I suppose more likely the exchange rate is not right. You’d want to have a reasonable exchange rate so that money can be used most efficiently. If currency is too strong like spending almost 5 dollars for one Big Mac in Switzerland, it may curb spending and you’d only order one burger, not two and slow down the economy. If it’s too weak, it may encourage people to spend more, which is what the Federal Reserve Bank is trying to do with a $600 billion pump into the economy. It’ll weak down the currency but inflation may rise due to the money supply being greater now. That’s Keynesian economics, btw. So, it’s that delicate balance again.

Right now, the cheapest Big Mac is in China and one reason they could do that is how many people they have in the country with over 1 billion people or 100 cities with more than 1 million people, so they are just trying to meet the demand and keep the currency low. Imagine how many burgers they are feeding into. For that, perhaps you’d want to order 3 big macs. :)

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Human capital

It seems that I’m doing a lot of thinking and reading, so I suppose that’s good. One thing I’ve been thinking about a lot is human capital and I believe that is what it’s going to set us apart from others when it comes to hiring and productivity—our levels of human capital.

So I saw this article – California high-speed rail hires CEO for $375,000.

An executive for the company that built France’s bullet trains will lead California’s high-speed rail project for a salary of $375,000, making him one of state government’s highest paid nonuniversity workers.
The California High-Speed Rail Authority board on Thursday unanimously voted to hire Roelof van Ark, 58, of New York as CEO of the $43 billion undertaking being touted as the largest public works project in the nation.

Van Ark will leave his job as president of Alstom Transportation, a role he has held since 2005. Alstom Transportation is the North American subsidiary of the French company Alstom, a corporation with $20 billion in annual sales that built France’s TGV bullet trains and employs 65,000 people.

My first thought was wow, that must be a nice sum of pocket money except the pay is actually low. Van Ark, the CEO, was earning close to a million dollars at his current position. Another thought is that Van Ark only needs to bring himself to the U.S. and his relocation expenses will be covered. How nice is that? Clearly, he’s got the human capital skill that is high in demand and the board is willing to pay him the salary.

That got me thinking and how I can raise my human capital and be more productive.

How To Make Money

I was glad to see this because I wrote a similar post so it affirms my thinking.

What People Buy

People only pay for what they want or need when the price is low enough to be a greater value then the alternatives. Think about your own buying decisions: When the need or desire is great enough you buy when itís not you donít. If the price is too high, you look for an alternative or go without. Sometimes the need or desire outweighs the reality that you canít afford it, hence the financial mess (debt) most folks put themselves into. But when the value is bigger than the other offerings, they buy.

Link

My post – The American Dream

And god, I need to re-work my website…

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Monetizing the Internet

When it comes down to monetizing the Internet, there are two different kinds of ads. One is a text-based ad or keywords, namely AdWords, which Google basically has a monopoly over. One reason why this works so well is due to the intentionality in users’ behavior. Say if a girl wants a Barbie, the mother would go to a search engine and type in ‘Barbie’, and whichever shopping site makes a catchy header or has the best sale shall get the successful transaction and the search engine that provides the referral gets the commission for being a middlemen. Which has the best search engine? Google, ofc. That’s why they’re so successful, having raked in $5.1 billion dollars this past quarter.

The other kind of ad is contextual ads, often displayed in banners and it is this area that many web companies are striving to get our eyeballs as many as they can. Google has AdSense. Facebook has banner ads, often seen on the right side of your browser. It doesn’t have the same sense of intentionality that I mention above and for this to work well, banner ads would have to be relevant and try to hold attention to our eyeballs and hope that it gets our pesky finger to click on their ads.

So, that’s pretty much how the Internet is monetized. Happy surfing and don’t forget to click!

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The American Dream

Thought I’d take a stab at explaining how economy works, generally speaking, in layman’s terms and from the macroeconomics’ perspective. I’m not trying to write a Ph.d dissertation so don’t be shooting me with reference whereabouts as I am just writing off my head, with what I know and being reasonable.

I suppose it’s hard not to be thinking about economy since that’s the hot issue right now, with 2.4 million jobs being lost—the most since 1940. Yikes. So, I’ve been thinking what economy really is. At first, I thought it is just a cycle that if studied and know how it works, enables you to become rich and have a great life, or in other words, living out the “American dream”.

Let me say that economy is purely abstract. It only exists as math in your head. Numbers. It used to be based on the value of gold till someone realizes that’s not necessary and break off the valuation. That’s because there are enough goods, services, and possessions created that apparently, people want them badly enough. Dollar simply provides the means for it. Want a Porsche? then you’d have to work your ass off till you have enough to afford it. Want some hot flesh lap dance and more some than that ? Pay some fat dollars. Nothing to do with gold. Just numbers.

Price is simply the amount that you would be willing to pay for it. Marketers are expert in pricing their items in such a way that it’s not too high that customers won’t pay nor too low as to lose the profits. They aim to achieve profit margin as wide as they can. No buy? then lower the price (called a sale) till customers say “hey, this is pretty affordable. I can purchase this.” A sale is made—seller gets money and the buyer is now one happy customer with the wanted good.

(more…)

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