Thursday, June 11, 2009

Globalization and Mickey D

Do you have trouble connecting global issues to your students' lives? Here's an interesting story that was on Marketwatch a few days ago that can bring the idea home.

The article points out that McDonald's had a decent month in May from the standpoint of "same store sales." That's an important measure of success and viability for a firm like McDonalds because it provides a stable basis for future growth. A company may grow by opening new stores, but if the new stores just shift demand from existing locations, or if existing locations can't generate enough revenue to "keep the lights on," the business is probably not sustainable.

But for our purposes, the key to this story is farther down. When exchange rates are factored in, the sales are actually down. That means when the improved sales in other countries were recalculated to dollars, things looked worse. This is likely because the dollar strengthened against a number of key currencies from March through May. Consequently, it took more units of foreign currency to equal a dollar in many markets. When sales were converted to dollars, the increase "disappeared".

If you want to take this idea farther, this story becomes particularly ironic because a McDonalds product is one measure of purchasing power parity - The Big Mac Index found in The Economist. (The link takes you to a simple explanation and an excellent video explaining the Index. The most recent publication of the index is February, 2009 - just prior to the period in question.)

Please share your thoughts.

This post references the following Keystone Economic Principles:
2. There ain't no such thing as a free lunch.
4. Economic systems influence choices.

6. Do what you do best, trade for the rest.
7. Economic thinking is marginal thinking.
9. Prices are determined by the market forces of supply and demand… and are constantly changing.

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