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Where do dollars stretch furthest?

SmarterTravel

Travelers to foreign destinations are often concerned about how far their dollars will stretch—or shrink—due to the relative strength of a foreign currency. As one reader recently put it, “Which Latin American country has the weakest economy? I am planning a vacation and would like to get the most ‘bang for my buck.'” As is so often the case, the answer is far more complicated than the question.

Relative purchasing power

Certainly, one part of the answer is the relative purchasing power of the dollar, compared with any given foreign currency. Specifically, calculating purchasing power means estimating how much more or less you’d pay in local currency, compared with dollars, for any given product of service—or for an average of a bunch of products and services.

Surprisingly, you find relatively few sources of hard data on comparative international purchasing power, especially when geared to short-term travel. Moreover, many of them are available only as for-pay proprietary economics data services. Still, average travelers can find a few good sources of information.

The OECD market basket

In theory, the best way to calculate relative purchasing power is to compare the prices, in each currency, for an identical mixed “market basket” of typical consumer goods and services. That’s what the Europe-based Organisation for Economic Co-operation and Development (OECD) does, regularly, for 23 European countries plus Australia, Canada, Japan, South Korea, Mexico, New Zealand, and the U.S. Here’s how some of those countries rank in data for August 2006:

  • The five most expensive countries for travelers with U.S. dollars (in descending order from the top) are Iceland, Denmark, Norway, Switzerland, and Ireland, where local prices are 45 to 53 percent higher than in the U.S.
  • At the other end of the scale, the five least expensive countries (again from highest to lowest) are Hungary, Poland, Slovakia, the Czech Republic, and Turkey, where local prices are 31 to 39 percent lower than in the U.S. Mexico is close to those low-cost countries.

Surprisingly, the U.K. registered only 17 percent above the U.S.—a figure that certainly doesn’t jibe with my experience. On my last several trips to the U.K., I’ve found local prices to be about the same number of pounds as comparable goods and services in dollars, meaning that the U.K. is 80 percent more expensive than the U.S. OECD also shows Canada as more expensive than the U.S., not in agreement with my recent travels, either.

You can check details of the other countries—as well as explore the methodology—by logging onto the purchasing power section of OECD’s website. Unfortunately, data do not cover many places outside Europe.

The “Big Mac” Index

One of the problems with market-basket calculations is that tourists typically don’t buy a lot of the basket’s components. That’s why quite a few serious analysts—including London’s highly regarded The Economist magazine—believe in using the relative price of one ubiquitous product rather than a mixed basket. That product is McDonald’s Big Mac hamburger, and the magazine regularly publishes a Big Mac Index for many of the world’s countries. Access to the full, current data list requires a paid subscription, but you can access some excerpts through a link on the foreign exchange website Oanda.

  • The countries with the highest Big Mac indices are Sweden and Switzerland, where Big Macs cost 44 to 60 percent more than in the U.S., and the entire euro area is 20 percent higher.
  • The least expensive Big Mac countries are all in Asia: China, Hong Kong, and Malaysia.

The Big Mac index covers a more diverse list of countries than the OECD data, but the number of countries is still limited.

Travel cost

Several private intelligence services publish cost-of-travel data, on a subscription basis, for guidance to business travelers and travel managers. I have no access to those for-pay services. However, analysts who don’t buy into one of those services often rely on figures from the U.S. government on per-diem travel allowances. Although those data cover business travel rather than vacation travel or resort stays, they’re probably a reasonable guide to comparative costs.

Since our reader asked about Latin American countries, here are the figures for daily accommodations, meals, and transportation costs in three of the largest countries in South America:

  • Argentina: $220 in Buenos Aires, $168 elsewhere
  • Brazil: $228 in Rio, $184 to $185 in Salvador de Bahia and Manaus
  • Chile: $215

You can check up on major U.S. cities and other countries online at the Department of Defense’s website.

Tourist costs

When you’re looking for a low-cost country to visit, local purchasing power may not be the real issue. Although our reader asked about finding countries with a “weak economy,” that often doesn’t mean low costs for visitors. Most economists would define weak economies in terms of low per-capita GDP, low average wage rates, high unemployment, poor education, and such. But in such “weak economy” countries, low scores by those measures don’t necessarily mean that tourist prices are correspondingly low.

Many of the countries with the weakest economies are underdeveloped nations, where most American tourists wouldn’t accept local standards of accommodations and meals. And, in those countries, tourist costs can be higher than they are in developed areas. Hotels and restaurants aiming for the international tourist market in many of the poorest countries are extremely expensive.

In developed countries, American visitors can pretty much travel like locals, which means that going downmarket is perfectly acceptable. But visiting resorts and tourist hotels in the really weak economies, you’re apt to pay more than you would in Western Europe, Australia, or Japan.

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