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The Litre of Milk Index - Assignment Example

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In our case, milk as a basic commodity is used to establish the currency relations against the US dollar. The idea is that depending upon the milk cost at local levels currencies…
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The Litre of Milk Index
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The Liter of Milk Index Data Analysis The average retail price of a liter of milk in the US is liter 2. The exchange rate of local currencies of Denmark, Brazil and New Zealand are as per the following.
One Danish kroner = 0.190975 U.S. dollars
One Brazil Real = 0.638978 U.S. dollars
One New Zealand dollar = 0.8358 U.S. dollars (Full Universal Currency Converter)
3. The average salaries in these three countries are:
Denmark- The average salary in Denmark is DKK 223,000 per year. (Danish 2011)
Brazil- The average Brazilian salary per year is R$60,000. (Salary Survey for Country: Brazil 2011)
New Zealand- The average salary in New Zealand per year is $50,000 (Average salary survey 2011)
The average retail prices of milk in these countries are as per the following.
Denmark: It costs DKK 7.86 per liter of milk. (Food Prices)
Brazil: It costs R$ 0.74 per liter of milk. (Brazil: Farm-gate milk prices)
New Zealand: It costs NZ$ 2.2 per liter of milk. (Dramatic fall in Milk Sales)
4. Converting above price in US dollars.
Denmark: The cost of milk in US$ is 1.5 per liter.
Brazil: The cost of milk in US$ is 0.47 per liter.
New Zealand: The cost of milk in US$ is 1.83 per liter.
The Big Mac Index philosophy focuses conversion of currencies based on purchasing power parity. In our case, milk as a basic commodity is used to establish the currency relations against the US dollar. The idea is that depending upon the milk cost at local levels currencies should adjust in their valuation with each other.
Tabulating milk index for the countries in our study:
Country
Currency
Milk Cost per Liter in local currencies
(Milk Index)
Currency valuation based on PPP of Milk Price, Based on 1 US dollar
Actual Exchange traded valuation for 1 US dollar
US
American Dollars
1.00
1.00
1.000
Denmark
DKK
7.86
7.86
5.230
Brazil
R$
0.74
0.74
1.565
New Zealand
NZ dollars
2.20
2.20
1.196
Source: http://www.xe.com/ucc/full/
Conclusion
It is clear from the table that the actual exchange traded currency valuation are different from the one found through the milk index. Purchasing power parity angle bring exchange of currencies at the different level. This philosophy can be extended with many other commodities to form a basket to decide about purchasing power parity of the currencies.
From above, it is clear that the currency of Denmark is overvalued as exchange rate should be 7.86 but in actuality it is 5.23. Similarly, the currency of Brazil is undervalued as it should be 0.74 against 1 US dollar but it is traded in exchange at 1.565. In the same way it can be said that the currency of New Zealand is also over valued against 1 US dollar.
References
1. Food Prices. Retrieved July 10, 2011 from, http://www.visitdenmark.com/uk/en-gb/menu/turist/turistinformation/faq/frequently-asked-questions.htm
2. Brazil: Farm-gate milk prices, Retrieved July 10, 2011 from http://www.clal.it/en/index.php?section=latte_brasile
3. Fox, Andrea (2011), Dramatic Fall in Milk Sales, Retrieved July 10, 2011 from http://www.stuff.co.nz/business/farming/4552625/Dramatic-fall-in-milk-sales
4. Statistics New Zealand, Retrieved July 10, 2011 from http://www.stats.govt.nz/browse_for_stats/economic_indicators/prices_indexes/tracking-milk-prices-in-the-cpi.aspx
5. Danish 2011, Retrieved July 10, 2011 from http://www.skat.dk/SKAT.aspx?oId=1880484
6. Average salary survey (2011) Retrieved July 10, 2011 from http://www.averagesalarysurvey.com/article/average-salary-in-new-zealand/07163011/income.aspx
7. Salary Survey for Country: Brazil (2011), Retrieved July 10, 2011 from http://www.payscale.com/research/BR/Country=Brazil/Salary
8. Full Universal Currency Converter, Retrieved July 10, 2011 from http://www.xe.com/ucc/full/ Read More
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