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The Beer Standard

Economics

The Beer Standard.In 1999, The Economist reported the creation of an index, or standard, for the evaluation of African currency values using the local prices of beer. Beer, instead of Big Macs, was chosen as the product for comparison because McDonald’s had not penetrated the African continent beyond South Africa, and beer met most of the same product and market characteristics required for the construction of a proper currency index. Investec, a South African investment banking firm, has replicated the process of creating a measure of purchasing power parity (PPP) like that of the Big Mac Index of The Economist, for Africa. The index compares the cost of a 375-milliliter bottle of clear lager beer across Sub-Saharan Africa. As a measure of PPP, the beer needs to be relatively homogeneous in quality across countries, and must possess substantial elements of local manufacturing, inputs, distribution, and service in order to actually provide a measure of relative purchasing power. The beer is first priced in local currency (purchased in the taverns of the locals, and not in the high-priced tourist centers). The price is then converted to South African rand and the rand-price compared to the local currency price as one measure of whether the local currency is undervalued or overvalued versus the South African rand. Complete the table below to find out whether the individual currencies are undervalued or overvalued.

Beer Prices Spot Under or Local Local In Beer Country South Africa Implied PPP rale rand Currency Rand (3/15999) Currency 2.40 Overvalued to mandes Castle Castle Pula 2.20 0,75 Star 1 200,00 Botswana Ghana Kenya Malawi Mauritius Cedi Shilling 379,10 18.30 Tusker Carlsberg Phoenix Windhoek 10.27 6.96 4.03 15.00 Namibia Kwacha Rupee NS Kwach 2,50 1.00 Castle Zamb Zimbabwe 1.200,00 9.00 140,63 Castle ZS

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