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The World Price Index

Released: April 12, 2016
Brazilian Real undervalued by 7% against US Dollar

  • Argentine Peso close to US dollar parity
  • Russian Rouble undervalued by 32%,
  • Chinese Yuan undervalued by 20%, Indian Rupee by 34%

BRICs all fundamentally undervalued
The latest set of World Price Index (WPI) data illustrates the varying degrees that the currencies of the so-called BRICs (Brazil, Russia, India and China) remained significantly undervalued, in terms of purchasing power parity (PPP), against the US dollar in April. The reasons why their currencies buy less of the same basket of goods than the dollar are different, but this situation is unlikely to change for some time.

Brazil’s Real strengthens by 6%
In April the undervaluation of the Brazilian currency moved from minus 13% against the US$ in March to minus 7% in April. This month the currency’s foreign exchange value was 3.68 Real to a US$ compared with a WPI rate of one US$ to 3.41 Real. This rise in the relative value of the Real represents a short respite after a long period of weakness. In December 2013 one US$ bought 2.08 Real, while two years later, in December 2015, one US$ bought just over 4.00 Real.

Brazil’s currency has been undervalued in PPP terms against the dollar since March 2015 at which point the WPI exchange rate was 2.92 Real to one US$ compared to a market rate of 2.93. The economic woes facing the Brazilian economy include slowing growth, a balance of payments deficit and rising inflation which have resulted in a market depreciation of 38% of the Real against the US$ from March to December of last year. A significant part of economic problems facing Brazil have been attributable to falling commodity prices, but there has also been severe economic mismanagement by the government of Dilma Rousseff.

Argentine Peso 0.7% overvalued
In sharp contrast to the currency consequences of poor economic policies in Brazil, the economic value of the Peso in Argentina, a formerly troubled Latin American economy continues to improve in terms of its PPP exchange rate. In April, the fundamental value of the currency came in at an overvaluation of 0.7%, close to parity, compared to an undervaluation of minus 10% the month before. This month one US$ acquired 14.69 Pesos while the WPI rate was 14.79 Pesos to one US$.

Macroeconomic mismanagement in Argentina in recent years had led to a deterioration in the real purchasing power of the Peso which fell from a WPI rate of one US$ to 6.30 Pesos in May 2013 to one US$ to 12.30 Pesos by October 2015. Over this period intervention by the Argentine authorities kept the Peso overvalued against the dollar at the cost of rapidly using up the countries reserves and rationing access to foreign currency. The rate of exchange of Pesos to Dollars on official exchanges in Argentina fell from one US$ to 5.25 Pesos to one US$ to 9.44 Pesos over the same period. The election of a new President and the removal of exchange controls led to a sharp change in the relative position of the Argentine currency against the dollar.

Russian Rouble 32% undervalued
The Russian Rouble remains undervalued against the US$ by 32%. In April, one US$ was worth 68.56 Roubles on foreign currency markets against a WPI rate of one US$ to Roubles 46.8. The undervaluation of the Russian currency in PPP terms has been caused by economic sanctions and the collapse in oil prices, but the purchasing value of the Rouble is also being undermined by rapidly rising prices.

From January 2011 through September 2015 Russian food prices were largely stable with monthly fluctuations moving in line with the official exchange rate. However, over the past seven months, the price of food has increased at an exceptional rate culminating in prices being 46% ahead of prices paid a year ago. Food price increases have been driven by increases in both the cost of staple goods, and in the price of imported goods. One of the main reasons being international economic sanctions on Russia.

China and India both undervalued
The currencies of the remaining BRICs – China and India – both remain undervalued by minus 20% and minus 34% respectively, In April, the Chinese currency’s foreign exchange value was Yuan 6.48 to one US$ compared with a WPI rate of one US$ to Yuan 5.15. There is unlikely to be any significant upward movement in the near future because of the People’s Bank of China (PBOC) need to stimulate flagging GDP growth by easy monetary policy.

The Indian Rupee has been undervalued for several years against the US$ in PPP terms. In April, one US$ bought 66.58 Rupees, but the WPI rate was one US$ to 43.95 Rupees. This fundamental undervaluation is unlikely to change significantly in the near future with India running a persistent current account deficit alongside high GDP growth.

About the World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity (PPP), reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons. Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate. Based on WPI global data the degree of currency under or over valuation in PPP terms by country is provided in the table and chart below.

Notes to Editors
  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released on the 2nd Working Tuesday of each month.
  • Latest month market exchange rates are calculated as an average of daily rates.

About The World Price Index
The World Price Index is calculated monthly from a basket of internationally comparable goods and services. It is designed to alleviate the horrendous problems associated with analysing economic or market data using currency market exchange rates.

Exchange rates vary with extraordinary rapidity, frequently with little obvious link to economic reality, but fatally distorting the perception of value in markets and economies. It is vital when analysing international data, whether for market analysis purposes, or to allocate resources across the globe, to review data using an international yardstick of value. This can only be done using Puchasing Power Parities (PPP), which make allowance for the purchasing power of currencies within individual countries to make comparisons based on a standard currency, usually "international dollars".

There are various sources of PPP data, but most are of only academic interest as they are years out of date. The World Price Index is the only available index updated monthly to provide an easy way of reviewing trends or relative values of market or economic data in realistic terms.

About World Economics
World Economics is an organisation dedicated to producing analysis, insight and data relating to questions of importance in understanding the world economy. Its parent company Information Sciences Ltd has a long history of the development of key business information today used throughout the world, including the origination of the Purchasing Managers Indexes in Europe and Asia (now owned by Markit), and the development of WARC a global information provider for major corporations .

Currently our primary research objective is to encourage and assist the development of better and faster measures of economic activity. In cases where we believe we can contribute directly, as opposed to through highlighting the work of others, we are producing our own measures of economic activity.

Our work is mainly of interest to investors, organisations and individuals in the financial sector and to significant corporations with global operations, as well as governments and academic economists.

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