World Economics - Insight , Analysis and Data

World Economics - Measuring the World Economy

The World Price Index

Released: February 9, 2016
Russian Rouble weakens to 43% Undervaluation

  • Chinese Yuan depreciates to 22% undervaluation
  • Turkish Lira at 36% undervaluation
  • Indian Rupee 34% undervalued against the US$

Most currencies remain undervalued
The latest set of World Price Index (WPI) data indicates that most of the world’s currencies were significantly undervalued against the US dollar in February apart from the pound sterling, the Euro and the Japanese Yen. The methodology behind the WPI involves collecting price data for a representative basket of goods across different countries. This allows the measurement of the real purchasing value of national currencies across the world in terms of their relative purchasing power against a comparable basket of goods in the US.

The dollar’s relative strength is due to the continuing expansion of the US economy, albeit at a decelerating rate, and the relative tightness of monetary policy across the world. The decision of the Federal Reserve to raise interest rates by 0.25% in December while the European Central Bank and the Bank of Japan are expanding the domestic money supply also contributes to the dollar’s strength. The weakness of the other currencies is due to a number of country specific factors, few of which are likely to change in the near future.

In theory, an undervalued currency in PPP terms should realign itself to fundamental value through economic reactions to changes in relative prices. An undervalued currency will see a rise in the relative price of imports and a lowering of the price of exports reducing the demand for the former and raising it for the latter producing changes in the demand for a currency relative to the currencies of its trading partners.

This adjustment process which should eliminate PPP differences is not working in many countries because of the long chains in value-added in manufacturing. A World Bank study from last year concluded that the rise in global value chains accounted for 40% of the fall in the value of export price elasticities in 46 countries between 1996 and 2012.

These countries are losing out as a result of costlier imports because of devalued currencies pushing up the cost of the inputs required in manufacturing processes prior to re-exporting. This is particularly a serious problem in the countries experiencing persistently high rates of PPP undervaluation against the dollar: Russia (-43%), India (-34%), Mexico (-33%), Turkey (-36%) and China (-22%).

Russian Rouble falls by 5%
The WPI data indicates that the Russian Rouble is the most undervalued currency surveyed standing at minus 43% against the US dollar. Over the last month the rouble has fallen by 4.8% in PPP terms, the largest change of any currency. In February, one US$ bought 79.2 Roubles compared to a WPI rate of one US$ to 45.4 Roubles based relative cost of buying a basket of goods in Russia and the USA.

The rouble is so heavily undervalued against the dollar because of the impact of economic sanctions on Russia’s trade and because of the fall in the price of oil on the value of the bulk of the country’s energy exports. In 2013, before the collapse in oil prices in the second half of 2014, 68% of Russia’s total exports of US$507 billion were energy related. Metals also comprise a significant part of exports and these have been hit by the fall in commodity prices. Russia’s non-commodity export trade has not been able to respond to an undervalued Rouble as a result of inflexibilities in the structure of the Russian economy produced by higher oil prices in the past, a case of what is known as the ‘Dutch Disease.’

Chinese Yuan at 22% Undervaluation
In February the undervaluation of the Chinese currency increased to minus 21.7% against the US$ from minus 20.0% the month before. This month the currency’s foreign exchange value was Yuan 6.58 to a US$ compared with a WPI rate of one US$ to Yuan 5.15. In June 2014, one US$ bought Yuan 6.18 against a WPI rate of 5.78, an undervaluation of only 6%.

Like many other countries the depreciation of the economy has not stimulated an export-led recovery. The Chinese currency’s undervaluation against the US dollar has widened as the economy has slowed and as the People’s Bank of China has eased monetary policy to combat deflationary pressures on asset prices and product markets. Since the start of the year the Bank has loosened reserve ratio requirements and pumped record sums of cash into the banking system, but much money is still flowing out of the country. China experienced an estimated capital outflow of US$1 trillion in 2015.

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.

World Economics welcomes your feedback, which should be addressed to

You can follow World Economics on Twitter and Facebook.
Receive next month’s report early:

Your email address:

© Copyright World Economics Ltd. 2016