“I’m ready to plan my next vacation!”
That sounds like fun: no emails, no worries, sipping a lemonade by the pool. But what about this crazy economy and our nervous wallets? If you’re interested in a budget-friendly destination for your next getaway, how do you find one in these inflationary times?
You can, of course, scroll through hundreds of online articles on cheap travel. (Be careful to check the date on your reading material!) But if you want to explore foreign lands, did you know you can also take a “secret” shortcut by using two indicators currency traders rely on?
Looking at how much the Big Mac costs in different countries, compared to the US, can give you a rough idea of how affordable a visit there could be.
The Economist magazine created the Big Mac index in 1986, as a tongue-in-cheek measure of purchasing power parity (PPP) between nations, using the price of a Big Mac as its benchmark. The joke was on them, as it turned out to be so useful that it’s been studied in universities, included in textbooks and respected by economists.
PPP theory states that over time, exchange rates between two countries’ currencies should adjust until the price of an identical basket of goods and services is the same. In this case, the basket is just a burger. Updated each quarter, the raw index tracks the prices of Big Macs to suggest what the exchange rate between two countries should be and then compares it to the actual exchange rate to show whether currencies are currently undervalued or overvalued against each other, for investment purposes.
But it’s also a pretty accurate tool for price comparisons. Because the popular burger is available in more than 100 countries around the globe, it makes a reasonable stand-in for the basket of goods used to build more local comparative price indices like the US Consumer Price Index.
Yes, a few places like Switzerland, Norway and Canada have us beat for the most expensive Big Mac, but the mighty burger is a steal pretty much anywhere else. The Euro area and Britain offer reasonable values these days but there may be better bargains on other continents. Think about enjoying the sights in New Zealand, Japan, Malaysia or India.
If you want to see if a country might be cheaper to travel to now than it used to be – before the pandemic, for example – you can look at the trend in the foreign exchange rate (forex). Like the Big Mac Index, forex charts are really built for currency traders, but you can use them as a rough guide to check out the purchasing power of your dollars overseas.
Right now the dollar is pretty strong, which means it’s been increasing in value compared to many other countries’ currencies. When the dollar is strong (as it’s expected to remain this year), it buys more abroad and makes foreign travel less expensive.
Current forex rates can be found on many financial news outlets and Federal Reserve websites, while specialty sites can provide historical perspective.
Look for currencies that are losing ground to the dollar. But be aware that inflation can have a major impact on a country’s currency. A country may look cheap today because high inflation has driven its exchange rate down, so check current inflation rates as well. If a country has a weak currency and high inflation, you might want to take that vacation sooner rather than later, before prices rise even higher.
Looking at the trend in forex over the past five years tells us it pays to go to Asia right now, because the dollar has tallied significant gains against currencies in countries like Japan, Hong Kong and Thailand. As for inflation, Japan’s current rate is only 2.6% so no worries. Thailand’s, in contrast, is currently 7.7%.
Both the Big Mac Index and the foreign exchange rate can give you a rough idea of where travelling might be less expensive. But your individual costs will depend on where you are going within a country (or the Euro area) – some cities are much more expensive than others – as well as how much luxury you want to enjoy. Also, just as in the US, not all prices rise in sync when there’s inflation, so some goods and services will be relatively more expensive than others.
Also, Covid is still officially out there. It’s a good idea to check the CDC’s Travel Recommendations before you make final plans to vacation overseas.
You’ll still need to do more homework to plan an affordable trip, but these tools offer a quick way to focus your options, no matter what tricks the global economy is up to.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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