Exchange Rate Blogging

Is the dollar undervalued? Evidence from the Apple Store's MacBook pricing policies. The cheapest configuration available in the US will run you $1,099. In Japan, the same thing costs 139,800 yen, which at current exchange rates is $1,275 or so. But in the Netherlands it costs 1,049 euros — $1,546.

On most other products, the price in dollars is same as the price in Euros. In other words, you can get a Mac Mini for $599 or you can pay 599 euros for the same thing. Except 599 euros is almost $900 at current exchange rates.

At any rate, I started doing the research and typing up the basic facts for this post this morning without really knowing what direction I wanted to take or what conclusions I was reaching. So it sat around as a draft, and then today I was in the Apple store and I saw a group of dudes from Italy roll in with a bit less than $3,000 in crisp $100 bills buy up a bunch of stuff. Holiday shopping in the era of the cheap dollar, I guess.

EDIT: I corrected a typo wherein I'd written "almost $600" when it should have been "almost $900."

Comments

Yes, but Tom Friedman had a conversation with a cab driver, so you see this will all work out just fine for everyone in the long run.

Posted by Nicholas Beaudrot | December 4, 2007 7:48 PM

Evidence from the Apple Store's MacBook pricing policies.

...is no evidence at all. The Apple policy has long been to charge a Non-US Buyer Premium. Back when the pound was closer to $1.50 than $2.00, it was still the exchange rate plus VAT plus 10% and round up to the nearest £50.

(Also, remember that GBP/EUR pricing usually includes VAT or the equivalent, while Apple Store US pricing excludes sales tax.)

People have been snapping up Apple laptops and gizmos while on tech conferences for years, because Apple fucks over non-US customers, regardless of the exchange rate.

[Commodity PC pricing is more interesting if you want to test your hypothesis.]

Posted by pseudonymous in nc | December 4, 2007 7:50 PM

599 Euros is how much there Matt?
Seems to be a bit more than $600, otherwise what's the point of the post?

Posted by Seth Davis | December 4, 2007 7:53 PM

(And EUR600 is almost $900, fwiw.)

Posted by pseudonymous in nc | December 4, 2007 7:53 PM

I was at a trunk show for the Mervis diamond folks (buying my wedding band! don't worry, no diamonds), and there were a lot of foreign folks there. When I asked one of the salesladies why, she said that since the dollar has tanked people are actually flying to the US from other countries to get good deals on diamonds and other jewelry.

Posted by Daniel Munz | December 4, 2007 7:54 PM

599 Euros is nowhere near $600. It's close to $900.

In fact, I have to ask if you've ever taken a class in fiscal/monetary policy, because this post is hopeless.

The dollar's decline has been almost entirely against the European currencies. The Yen and the Renminbi are basically pegged to the Dollar. So are the Saudi and Kuwaiti Dinar.

Seriously, Matt, stop blogging on this.

Posted by Greg | December 4, 2007 7:54 PM

Ack! That should be Saudi Riyal! (There's no such thing as a Saudi in currencies)

Posted by Greg | December 4, 2007 7:56 PM

That was a pretty bad typo, kind of negated the whole point of the post. I knew he meant 900 Euros, but still...

Posted by Eric K | December 4, 2007 7:59 PM

What a bunch of fucking school marms you commenters are. If you are reading Yglesias and care about the exchange rates you already know that $599 is not 600 Euros.

I have to ask, Greg have you ever gotten laid because you seem pretty hopless. You should seriously stopping commenting here because it only reinforces the impression that you are a 36 year old eunuch living in the boiler room at the Federal Reserve.

Posted by no shit | December 4, 2007 8:29 PM

This is the typo you correct? Why start now?

Posted by Reality Man | December 4, 2007 8:58 PM

"I started doing the research and typing up the basic facts for this post this morning without really knowing what direction I wanted to take or what conclusions I was reaching."

Your commentary would be a lot more incisive if you took this approach with more of your posts. This is essentially the opposite of the tack you seem to have taken with your post on Metcalf, or with your August -September posts on Beauchamp or Petraeus. In each of those three cases, you started with an ideological bias and proceeded from it.

Posted by Fred | December 4, 2007 9:01 PM

Yes, Fred. Because the hereditarians don't start from an ideological basis and proceed from it. As I keep saying, simply asserting that your side is rational and the other emotional is not argument.

Posted by Freddie | December 4, 2007 9:40 PM

The dollar's decline has been almost entirely against the European currencies.

Exactly. Unless you count the Canadian dollar. Or Australian dollar. Or you note that, despite the policy of Japan's central bank, the dollar has declined against the yen to 7-year lows. Or you look at Central American or African currencies.

But if you ignore all that, then your point is 100% correct Greg.

Posted by JoshA | December 4, 2007 9:43 PM

"Because the hereditarians don't start from an ideological basis and proceed from it."

Actually those who call hereditarians (not really accurate, because I don't know anyone who claims heredity explains all of the IQ gap) tend to be more open to inquiry and debate than liberal creationists who refuse to consider any hereditary component to the gap.

Posted by Fred | December 4, 2007 10:34 PM

I read somewhere, but cannot remember, find, or google it, that the reason companies (say, Apple) don't up the cost in dollars to reflect the weakened dollar value (and standardize the cost of their Mac Mini, say, to their Euro) is that the American market is so big that no company wants to lose market share here.

For what that's worth.

Posted by mikey | December 4, 2007 10:35 PM

Two points:

Apple sets the price for each model once (when it is introduced) so the implicit exchange rates today may reflect the rates 6-9 months ago. Also, Apple likes to pad foreign prices a bit (say 10%) to guard against adverse exchange rate movements in the subsequent 6-9 months. Apple's US/Canada prices were almost exactly equal a year ago, but are 10% out of line now.

In setting US prices, Apple actually starts with a price point, and configures a model to match it. Thus, the entry-level iBook/MacBook has always been $1100-1250, the entry-level PowerBook/MacBookPro is around $2000, the iMac $1200. As the prices of components drop, they simply give you more product for the same price (eg, the 20-inch iMac is now the price of 17-incher six months ago).

Posted by Charlie | December 4, 2007 11:03 PM

Matthew-san

We should consider a PPP (purchasing power parity) when we compare prices in different countries though nonsense to discuss what appropriate exchange rate is from a PPP. A PPP “equalizes the purchasing power of different currencies in their home countries for a given basket of goods” and is “used to compare the standards of living between countries, rather than a per-capita gross domestic products comparison at market exchange rates.” In this sense, “Japan's nominal GDP per capita is around US$37,600, but its PPP figure is only US$30,615.” Japanese purchasing power is about 80% of what appeared in nominal GDP per capita. In this sense, Apple should consider about 20% off from the US price in Japan to get market edge beside exchage rate.

Posted by dude | December 4, 2007 11:15 PM

Not only that, but Apple won't ship overseas, to APO addresses.

And sadly, while the dollar has been tanking, airlines have lowered the weight limit on luggage, so that we can't carry as much back as we used to.

You really have to stop and consider, when you're standing in Target, toothpaste or contact solution?

Posted by KathyF | December 4, 2007 11:36 PM

"Exactly. Unless you count the Canadian dollar. Or Australian dollar. Or you note that, despite the policy of Japan's central bank, the dollar has declined against the yen to 7-year lows. Or you look at Central American or African currencies.
But if you ignore all that, then your point is 100% correct Greg."

The first two I ignored because the dollar's fall against the Loonie and the Australian has been much, much less precipitous than that against the Pound and the Euro, the two currencies which have borne the brunt of the devaluation of recent years.

Since 2001, the dollar has fallen over 30% against the pound and more than 40% (it's getting very close to 50%) against the Euro.

These numbers are much, much bigger than the dollar's decline against the Yen.

So I really don't think that it's in any way wrong to say that the dollar's decline has been mostly against the Europeans.

The problem is, after the subprime fiasco, the willingness of the Asians to lend us money is practically nonexistent. So if they start selling off our debt, which is already happening, the dollar's going to decline like a rock.

However, the Yen doesn't have as solid a peg as the Renminbi to our dollar. So, it's finally started to see appreciation against the dollar, too, and it's going to keep going.

The catastrophe would be if the Chinese decide to cut loose by pegging the Renminbi to a basket of currencies. Then you're going to start seeing the Yuan rise against the dollar too. Or if you see oil priced in Euros, that's going to screw us pretty bad as well.

As for the harsh wording of my original post, it stemmed most of all from Matt's typo regarding 599 euros ~ $600.

Posted by Greg | December 5, 2007 12:19 AM

The significance is this is that exchange rate movements have a much smaller effect on prices than they "ought" to -- economsists call ti the exchange rate pass-through puzzle. Exporters with market power (i.e. anything with a brand name) prefer to leave prices unchanged in various markets even when exchange rates mean they diverge quite sharply. (A major, but not exclusive, reason for this is to maintain market share.) This in turn means that exchange rate movements are much less important than is commonly claimed in restoring current account balance. That is much more liekly to happen though income shifts. in other words, what you're seeing is the reason taht the declinign dolalr will NOT eliminate, or even substantially reduce, the US current account deficit. That will require either (a) a reduction in US consumption, i.e. a recession, (b) an increase in foreign demand, or (c) quantitative controls on trade flows.

one of the many blind spots of the economic profession is a greatly exaggerated view of the improtance of prices.

Posted by lemuel pitkin | December 5, 2007 12:24 AM

PS: The answer to the question posed by the original post is:

No, our current accounts deficit is massive, and the Chinese refuse to change their currency peg.

You're going to see a lot more depreciation.

Furthermore, a great deal of the situation depends on people's expectations regarding what the government will do.

As the Cunning Realist maintains pretty convincingly, Helicopter Ben is going to keep throwing money from the roof tops, and our fiscal authorities are going to keep spending. So our money's going to become more and more worthless.

Posted by Greg | December 5, 2007 12:25 AM

But lemuel, we *are* seeing the beginning of a recession; at the very least the housing sector is in a recession at best, but maybe even in a depression.

I was talking this over with Econ prof today, and the answer he suggested to me is that if we look at manufacturing (for example) as a percentage of GDP, we'll see that it's fallen over the years, while payroll in manufacturing has also fallen.

Thus, I think you're probably right, because at this point, the price changes would have to be astronomic to make up for the fact that our manufacturers are simply not going to close the current accounts deficit on their own.

Neither will tourism, the other sector thrown out by economists, if we're keeping out tourists.

Posted by Greg | December 5, 2007 12:30 AM

Greg,

Yes, I think that if the current account moves toward balance it will be because of a major reduction in US consumption, driven by the housing bust and sharp reduction in consumer credit.

On the other hand, if the political implications fo that get too scary, it's entirely possible that the US government will impose various ad-hoc controls on trade and maybe even capital flows. It's not polite to talk about, but if the Chinese decide they want to cash in their American securities, we don't actually have to let them. This was the approach taken as recently as the Nixon administration and, more informally, under Reagan.

The bottom line is that exchange rates are a pretty small part of the picture. (And the other bottom line is that while the adjustment will cause some pain here, it will cause a lot mroe pain abroad.)

Posted by lemuel pitkin | December 5, 2007 12:55 AM

Helicopter Ben is going to keep throwing money from the roof tops, and our fiscal authorities are going to keep spending.

Right. The authorities are very reluctant to risk the kind of contraction taht would be encessary to balacne the current account on the income side. And note that because US foreign liabilities are, uniquely, denominated in our own currency, dollar devalutaion improves matters on the capital account by ereducing the value of our external liabilities relative to our assets abroad. Obviosuly, that only works if foreign investors hold onto their assets here. But given how much foreign investment in the US is by Asian central banks and otehr state and quasi-state entiteis, that's realyl a question of polticis rather than economics. And on politics, the US still holdds the whip hand.

One outcome of you can bet on of any crisis in the dollar -- foreign investors in US assets are never going to see most of their money again.

Posted by lemuel pitkin | December 5, 2007 1:02 AM

Excuse me. But I lived in Amsterdam for 1.5 years, and ALL computer equipment was ALWAYS much more expensive there than in the US.

I assumed this reflected VAT taxes on computer equipment. And, indeed, when I mail-ordered some kind of drive from the US, I had to pay heavy duties on it.

This was at a time when the dollar was worth 1.25 Euros, rather than the other way around.

Posted by brooksfoe | December 5, 2007 1:31 AM

"$3,000 in crisp $100 bills", eh? So what you're really saying is that the reports of a cheap dollar provides good cover for foreign counterfeiters to pass lots of phony bills without raising suspicions.

Posted by Galen | December 5, 2007 2:04 AM

The first two I ignored because the dollar's fall against the Loonie and the Australian has been much, much less precipitous than that against the Pound and the Euro, the two currencies which have borne the brunt of the devaluation of recent years.

Since 2001, the dollar has fallen over 30% against the pound and more than 40% (it's getting very close to 50%) against the Euro.

Again, bull. You're just inventing your facts. I lived in Canada in 2001. The C$ was worth about $0.65. Now, the C$ is just above parity. That puts the decline agains the loonie pretty much on par with the decline against the euro and pound.

Posted by ERM | December 5, 2007 3:50 AM

Oops, second paragraph of the foregoing comment should be in quote italics also.

Posted by ERM | December 5, 2007 3:51 AM

Does the webcam in that MacBook record audio? I'm a roving English teacher (currently in Korea) and I use Skype a lot, and headsets are a hassle and seem to break pretty often.

Posted by aleks | December 5, 2007 6:29 AM

Lemuel, if the Chinese decide they want to cash in their American securities

I'm not an expert, and I see your point about this "exchange rate pass-through puzzle", nevertheless I think you underestimating the deterministic component in this process. People don't just decide to cash in; even if they do, it'll case a reaction, dollar-denominated interest rates will go up and people who wanted to dump their dollars will have to reconsider (assuming that they are rational actors).

The conventional economists might be wrong about many things, but is there really any doubt that an economic system (national or international) is an equilibrium? As long as the economy can maintain its equilibrium it'll function somehow, and the Chinese will not decide to cash in, it would be irrational.

Now, if there's no equilibrium anymore, then, of course, anything can (and will) happen, but not because the Chinese decided to do something. There must be some extraordinary event, some scare that would cause a panic, and then everybody (Chinese and non-Chinese) will start dumping their dollar-nominated securities.

Posted by abb1 | December 5, 2007 6:45 AM

One weird thing about going into the Apple Store in London is how many products have literally the same price in Pounds as they do in Dollars in the States. The sale prices can actually look appealing, until you remember the factor of two in the exchange rate.

Posted by Marshall | December 5, 2007 8:36 AM

I'd like to add that purchases on the itunes shop are equally shocking. You must buy from the store of the nation (or currency community) in which you hold a credit card meaning that an american credit card will buy you a song for $.99 while a British card will buy you the same song for £.79p (~$1.60). The numbers are different, but apple cleans up by charging different countries different amounts of money for the same tiny piece of digital information.

Posted by another brit resident | December 5, 2007 8:57 AM

My only comment is: wow, this looks great to me as an American. I can get this crap cheaper than people in other countries. What's the downside, again?

Posted by Al | December 5, 2007 11:12 AM

I will echo the point that prices are set long before we know what the current exchange rates are. It's just much easier to set the prices and not worry about what happens to the exchange rate until you decide to re-set prices again. That is unless you decide to change your international prices frequently, which customers in my field dislike even more.

Posted by JordanT | December 5, 2007 12:28 PM

Does the webcam in that MacBook record audio? I'm a roving English teacher (currently in Korea) and I use Skype a lot, and headsets are a hassle and seem to break pretty often.

Yes, it does. On behalf of all the people you will chat with, I beg of you not to do this. The built-in mike will also capture all background noises (including an echo of your own voice) and make it very hard for anyone to understand you. Get a sturdy headset.

For an actual comparison of sound quality, compare the two participants in this video chat:

http://bloggingheads.tv/video.php?id=451

Posted by Charlie | December 5, 2007 2:07 PM

US companies have been ripping off European customers for ages, just because they can, they're greedy and exploiting monopoly positions - it doesn't have anything to do with the exchange rates.

For example: I could order and download the Adobe CS3 Suite through the UK online store or book a nice weekend break in New York and buy the software there - all for the same price. The upgrade versions even have a markup of a full 100% for the UK.

Apple and Microsoft aren't quite as shameless, but still have unjustifiable markups.

Posted by novakant | December 5, 2007 3:04 PM

Matt,
You're making your provincialism obvious with this post. Most products are cheaper in the US and always have been. I've brought guitars, computers, radar detectors, cameras, misc electronics, etc. to overseas relatives because things are always cheaper in the US (and not in one trip). This was true even when the dollar was uber-strong.

Posted by Mo | December 5, 2007 3:25 PM