What is the Starbucks Index
The Starbucks Index is a measure of purchasing power parity (PPP) comparing the cost of a tall latte in local currency against the U.S. dollar in 16 countries. The Starbucks Index was created by The Economist based on its original Big Mac index which was described as “a lighthearted guide to whether currencies are at their “correct” level." Using this index, the purchasing power of each national currency can be reflected in the U.S.-dollar cost of a latte in that country. A latte costing significantly less in one country suggests an undervalued currency. The Wall Street Journal regularly publishes a similar "Latte Index."
BREAKING DOWN Starbucks Index
The Starbucks Index measurement of PPP is a theory that goods in one country will cost the same in another country, once the exchange rate is applied. According to this theory, two currencies are at par when a market basket of goods is valued the same in both countries. PPP rates are determined by comparing the prices of identical items in different countries. This comparison is often difficult, however, due to differences in product quality, consumer attitudes and economic conditions in each country.
Relative purchase power parity considers the difference between two countries’ rates of inflation in driving changes in the exchange rate between the two countries over time. RPPP expands on the idea of purchase power parity, and complements the theory of absolute purchase power parity.