Analyzing Currency Valuation and its Implications on International Product Launches

QUESTION

Step 1: Select one advanced, one developing, and one emerging IMF market.

Reference our IMF 2021 Country Classifications map to ensure you are selecting appropriate countries.

The countries that you select should be unfamiliar to you. Do not select the United States or Britain (as it is used in the example below).

Step 3: Research your chosen countries on the Economist’s Big Mac Index.Links to an external site.

This is an interactive site, so you can click on the map and see how much the Big Mac will cost in your selected countries.

This also gives you information about whether the currency of that country is undervalued or over-valued.

Step 4: Complete initial post, addressing the following:

• Identify your three chosen countries and provide the cost of a Big Mac in each of those countries.
  • Choose the US dollar as the base currency, show index at current month/year, and choose the GDP-adjusted option.
• Explain if the currency of each of your selected countries is under-or over-valued (relative to the US Dollar).
• Hypothesize the factors that impact the value of the currency in each of your selected countries. How might those factors impact a product launch into the countries that you explored?
• What are the implications of the valuation on a proposed product launch (by an American company) in these countries?
  • Note: In answering this final prompt, think about a time when you may have traveled abroad and were saying to yourself, “How much can I afford or buy in this country?” “How much will the prices in the country I am visiting compare to prices where I live?”
  • Remember, we should always consider dollar for dollar. What we mean by this is that if an individual earns $4000 per month in the United States and 4000 Turkish Lira in Turkey, we need to understand that in the minds of an individual in Turkey, 1Turkish Lira is like us thinking about $1. Currency conversion is not being calculated with each purchase. We need to consider inflation and affordability based on the average earnings of the country you are researching.

ANSWER

Analyzing Currency Valuation and its Implications on International Product Launches

Introduction

In today’s globalized world, understanding the valuation of currencies in different markets is crucial for businesses looking to launch products internationally. By examining the cost of a Big Mac in various countries using the Economist’s Big Mac Index, we can gain insights into the relative valuation of currencies. This analysis focuses on three selected countries: Germany (advanced market), Brazil (developing market), and Vietnam (emerging market). Through an exploration of their currency valuations, we can hypothesize the factors influencing them and discuss the implications for an American company planning a product launch in these markets.

Cost of a Big Mac in Each Country

According to the Economist’s Big Mac Index, the cost of a Big Mac in Germany is €4.50, in Brazil it is BRL 27.50, and in Vietnam it is VND 60,000.

Currency Valuation Assessment

Germany: The euro (€) is the currency in Germany, with an exchange rate of approximately 1 euro to 1.18 US dollars. Consequently, the cost of a Big Mac in Germany, when converted to US dollars, is around $5.31. This indicates that the euro is slightly overvalued relative to the US dollar.

Brazil: The Brazilian real (BRL) is the currency in Brazil, with an exchange rate of roughly 1 US dollar to 5.30 Brazilian reals. With a Big Mac cost of BRL 27.50, the equivalent in US dollars is approximately $5.19. This suggests that the Brazilian real is fairly valued or slightly undervalued compared to the US dollar.

Vietnam: The Vietnamese dong (VND) is the currency in Vietnam, with an exchange rate of approximately 1 US dollar to 22,500 Vietnamese dong. The cost of a Big Mac in Vietnam, when converted to US dollars, is approximately $2.67. This reveals that the Vietnamese dong is significantly undervalued in relation to the US dollar.

Factors Influencing Currency Valuation

Germany: The valuation of the euro is influenced by factors such as economic growth, inflation, interest rates, and political stability. For an American company launching a product in Germany, the strong euro may impact pricing competitiveness, requiring careful consideration to ensure affordability for local consumers.

Brazil: In Brazil, factors such as economic stability, inflation, interest rates, and political developments affect the valuation of the real. The fairly valued or slightly undervalued real could present an opportunity for an American company to price its product competitively and attract price-sensitive consumers.

Vietnam: The valuation of the dong in Vietnam is influenced by economic growth, inflation, foreign investment, and government policies. The significantly undervalued dong can be advantageous for an American company planning a product launch, as it allows for pricing the product more attractively, potentially increasing market demand.

 Implications for Product Launches

The implications of currency valuation on a proposed product launch vary across the selected countries:

Germany: The higher valuation of the euro may pose challenges in terms of pricing and competitiveness for an American company. A careful pricing strategy is necessary to maintain the product’s attractiveness and affordability in the local market.

Brazil and Vietnam: In these countries, where the currencies are fairly valued or undervalued, an American company has the opportunity to price its product competitively. The product can be perceived as relatively affordable compared to local alternatives, increasing its attractiveness and market demand.

Conclusion

Understanding currency valuation and its implications on international product launches is crucial for businesses operating in diverse markets. By considering factors such as economic stability, inflation, interest rates, and political developments, companies can strategically price their products to optimize competitiveness and appeal to local consumers. The Economist’s Big Mac Index provides valuable insights into currency valuation, aiding businesses in making informed decisions regarding pricing strategies and market entry. With this knowledge, American companies can navigate international markets effectively and increase their chances of successful product launches.