The Chai Latte Global Index is trying to show the purchasing power of different country’s currencies in a funny and easy way, upon Starbuck’s global pricing strategy. It is also based on the theory of the purchasing power parity (PPP) and that exchange rates in the future should change, so the purchasing power of two different currencies and therefore the prices of the same products and services are equalized, by resolving differences like cost of living and inflation rates.
Since chai latte has become popular outside of its homeland India, it conquered almost every corner of the world. This delicious black tea, infused with warming exotic spices and combined with steamed milk, is not just a delightful hot drink, but can also show the economical differences in the world.
Theoretically the price of a Starbucks Chai Latte in New York should be the same as the price of a Starbucks Chai Latte in Berlin, Istanbul and everywhere else, but it is not, although the ingredients are mostly consistent. For instance, a Starbucks Chai Latte in Colombia costs 9300 Colombian Pesos, which makes, at the current exchange rate, about $3,25 USD. In Sweden, on the other hand, it costs 5,40 Euro, which makes around $5,76, meaning that a Colombian would pay much more for a Chai Latte in Sweden than in Colombia or even less in India ($2,94).
This means that the Colombian pesos are undervalued to the Swedish Euro or to the USD, since a Chai Latte costs about $4,84, because the value of the Colombian Pesos in the exchange with USD or Euro is less than it should be considering economic conditions.
The USD is overvalued against almost all currencies in the world, but generally an overvalued currency doesn’t necessarily mean that the economy is the biggest, as well as an undervalued currency does not mean that the country’s economy isn’t strong. For instance, a currency might be undervalued because of a lack of demand. There might also be different reasons, like the willingness of investors to take risks or uncertainty in general, a lower business confidence and growth projection, political instability and low tax collections.
The Chai Latte Global Index should not be considered as an accurate way of measuring, but rather a less heavy way of seeing economics, since it is by far not perfect. When calculating the accurate purchasing power parity for long and short term or for having a more realistic view on the economical differences, other factors must be considered and differentiated.
For instance, actual differences between the Starbucks’ Chai Latte drinks worldwide must be taken into consideration, like size and ingredients and how easy obtainable the ingredients in the specific countries are. In India for example, where chai latte originates from, the obtainability of the special spices you need for this drink is much higher than in Canada. So countries that don’t produce these spices locally, like Canada or Sweden, have other costs that have to be considered, like transport costs and tariffs for importing the goods. When looking at the purchasing power parity, an important point are the non-traded goods, which are not traded internationally, like Starbucks’ or Mcdonald’s products.
The price of these products is influenced by input costs that are hard to be equal worldwide, like the cost of labor, storefront costs, heating, insurances etc. When these non-traded items or services costs are high, the goods in this country will also be more expensive and the country’s currency will most likely be overvalued against the currencies of countries with low-cost non-traded services. Therefore the higher labor cost is a big reason for the higher Chai Lattes prices in countries like the US, Germany, the Netherlands, France, Sweden and Austria, while the prices in Mexico, Egypt, Argentina and India are lower.
Another influencing factor for product prices in some countries are sales taxes, like the value-added tax (VAT), which are higher in some countries, especially European countries, and make products or services sell at higher price. An important factor is also the inflation rate, showing at which rate the price of certain goods change in the countries and can show the value of their currencies.
To get a more accurate picture of the fair value of a country’s currency these factors should definitely be considered, or the GDP per person should be taken into relation to the prices of the products, but again the PPP-theory within this Chai Latte Global Index is not a science but rather a much more light-hearted and fun way to look at economy.
See the infographic here of below.