🚨 Korean Won's Purchasing Power Hits Lowest Since Financial Crisis
Today Korean Economic News for Beginners | 2025.11.19
0️⃣ 33.6% Undervalued vs Dollar by Big Mac Index, Real Effective Exchange Rate Plummets
📌 Real Effective Exchange Rate Down 15% from 2020...Rising Import Prices and Increased Corporate Cost Burden
💬 The real purchasing power of the Korean won has fallen to its lowest level since the 2008 financial crisis. According to data from the Bank of Korea and the Bank for International Settlements (BIS), the won's real effective exchange rate has dropped to around 85, when 2020 is set at 100, representing approximately a 15% decrease in purchasing power. Based on the Big Mac Index, Korea's Big Mac price converts to about $3.84 in dollars, while the US price is $5.79, indicating the won is approximately 33.6% undervalued against the dollar. While currency weakness can provide some advantages to export companies, in Korea's industrial structure with high dependence on raw materials and component imports, it actually acts as a cost burden. Analysis shows that when the real effective exchange rate falls by 10%, the operating profit margin of large corporations decreases by an average of 0.29 percentage points. Experts emphasize that "structural responses through export expansion and investment activation are necessary."
1️⃣ Understanding It Simply
Recently, the value of the Korean won has dropped significantly, and our ability to buy things - our "purchasing power" - has fallen to the lowest level since the 2008 financial crisis. This means more than just the exchange rate going up; it means what we can actually buy with our money has decreased.
Let me explain what purchasing power means in simple terms. Imagine Person A has 10,000 won. Last year, they could buy 2 hamburgers with this money, but this year they can only buy 1.5 hamburgers. Person A's purchasing power has decreased. The face value of the money is still the same 10,000 won, but what they can actually buy has decreased.
There are two main indicators that measure the won's purchasing power. One is the "real effective exchange rate" and the other is the "Big Mac Index."
The real effective exchange rate might sound complicated, but simply put, it's an indicator that comprehensively shows how much value our country's money has compared to other countries' currencies. It doesn't just look at the won-dollar exchange rate, but considers the currencies and prices of various countries we trade with.
When 2020 is set as the baseline (100), the won's recent real effective exchange rate has fallen to around 85. This means purchasing power has decreased by about 15% compared to 2020. For example, imported goods that you could buy with 10 million won in 2020 are now worth only about 8.5 million won.
The Big Mac Index is more intuitive. It's an indicator that estimates currency value by comparing the price of Big Mac hamburgers sold at McDonald's worldwide. Created by the British economic magazine The Economist, it's based on the idea that "if the same Big Mac has different prices in different countries, it's because of different currency values."
In Korea, a Big Mac costs about 5,500 won. At the current exchange rate (about 1,430 won), that's approximately $3.84. In the US, a Big Mac costs $5.79. The same Big Mac is much cheaper in Korea, right? This means the won is undervalued by about 33.6% compared to the dollar.
"Isn't it good if our money is cheap?" you might think. In the past, it could have been. When the won weakens, the overseas price competitiveness of our products increases, which had the effect of boosting exports. For example, let's say Samsung Electronics exports a $1,000 smartphone. When the exchange rate is 1,200 won, they make a profit of 1.2 million won, but when the exchange rate is 1,430 won, they make 1.43 million won. They earn an extra 230,000 won selling the same product.
But reality isn't that simple. Korea depends on imports for a significant portion of raw materials and components. To make semiconductors, you need to import silicon wafers, special gases, and precision equipment. To make cars, you need to bring in steel, aluminum, and battery materials. When the won's value falls, all these import costs increase.
Let's look at a specific example. Suppose Company B produces semiconductors. This company imports $10 million worth of raw materials every month. When the exchange rate was 1,200 won, it cost 12 billion won, but when the exchange rate becomes 1,430 won, they need 14.3 billion won. That's an additional 2.3 billion won in costs every month. That's 27.6 billion won a year.
The money earned from exports increased slightly, but the cost of importing raw materials increased much more. Ultimately, total profits might actually decrease. According to actual research, when the real effective exchange rate falls by 10%, the operating profit margin of large corporations decreases by an average of 0.29 percentage points.
It also directly affects individual lives. Many products we buy at the supermarket are imported or made with imported ingredients. This includes almost everything: oil, flour, meat, fruits, clothing, and electronics. When the won's value falls, prices for these items rise.
For example, Person C fills up their car with 50,000 won worth of gas every week. Since oil is entirely imported, it's directly affected by exchange rates. When the exchange rate rises by 20%, gasoline prices also rise considerably, so Person C has to spend more money to travel the same distance.
Also, for families traveling abroad or sending children to study overseas, the burden is greater. Person D is sending their child to study at a US university. They need $50,000 for tuition and living expenses for one year. When the exchange rate was 1,200 won, it was 60 million won, but now they need 71.5 million won. They need to prepare an additional 11.5 million won.
So why has the won's purchasing power fallen like this? There are several complex reasons.
First, the interest rate difference with the US. As the Federal Reserve (Fed) kept interest rates high to control inflation, investors began to prefer dollar assets with higher returns. If Korea's interest rate is 3.5% but the US interest rate is 5.5%, investors naturally want to invest in the US. This capital movement encourages won weakness.
Second, deteriorating trade balance. Recently, exports have been sluggish in most items except semiconductors, while imports increased due to rising energy prices. When imports exceed exports, demand for dollars increases and the exchange rate rises.
Third, increased overseas investment by domestic investors. Individual investors called "Seohaggaemi" (westward ants) invested massive amounts in US stocks, causing dollar demand to surge. As we saw in earlier news, $6.8 billion flowed out in October alone.
Fourth, confidence issues in the Korean economy. Foreign investors are selling Korean assets and leaving due to productivity slowdown, weakened corporate competitiveness, and structural problems. This is also a factor in won weakness.
Ultimately, the decline in the won's purchasing power is a signal that our economy is not building fundamental competitiveness. While short-term measures to defend the exchange rate are needed, more importantly, long-term structural improvements like increasing exports, improving productivity, and corporate innovation are essential.
2️⃣ Economic Terms
📕 Real Effective Exchange Rate
The real effective exchange rate is an exchange rate indicator that comprehensively considers the currency values and price levels of multiple trading partners.
- It doesn't just look at the won-dollar exchange rate, but reflects the currencies and prices of major trading partners like China, Japan, and Europe.
- When the baseline point (e.g., 2020) is set at 100, if the number decreases, it means the won's real purchasing power has fallen.
- Currently, the won's real effective exchange rate is at the 85 level, down 15% from 2020.
📕 Big Mac Index
The Big Mac Index is an indicator that evaluates the appropriate value of currencies by comparing Big Mac hamburger prices in each country.
- Created by the British magazine The Economist, it's based on Purchasing Power Parity (PPP) theory.
- If the same Big Mac sells at different prices in different countries, it reflects differences in currency values.
- Korea's Big Mac converts to $3.84 in dollars, while the US is $5.79, showing the won is 33.6% undervalued.
📕 Currency Weakness
Currency weakness is a phenomenon where the value of a country's currency falls compared to other countries' currencies, especially the dollar.
- When currency weakens, the price competitiveness of exports increases, but import prices rise.
- In countries like Korea with high raw material dependence, currency weakness increases corporate cost burdens.
- When the real effective exchange rate falls by 10%, the operating profit margin of large corporations decreases by an average of 0.29 percentage points.
📕 Purchasing Power Parity (PPP)
Purchasing Power Parity is an economic theory that compares the real purchasing ability of each country's currency.
- It's based on the "law of one price," which states that the same product should sell at the same price in each country.
- The Big Mac Index is an easy application of purchasing power parity theory.
- If the PPP-based exchange rate is higher than the actual exchange rate, that currency is considered undervalued.
3️⃣ Principles and Economic Outlook
✅ Mechanism of Real Effective Exchange Rate Decline
The real effective exchange rate is a comprehensive indicator that shows the economy's real competitiveness beyond simple exchange rate fluctuations.
First, nominal exchange rates and price differences work together in complex ways. The won-dollar exchange rate being 1,430 won is the nominal exchange rate. However, if Korea's inflation rate and the US inflation rate are different, real purchasing power can differ from the nominal exchange rate. For example, if Korean prices rise 3% per year and US prices rise 5%, the won's real value has relatively increased. However, recently the real effective exchange rate has fallen even though Korea's inflation rate is relatively low, meaning the nominal exchange rate decline (won weakness) is that severe.
Second, the composition of trading partners is important. Korea trades with various countries including China, the US, Japan, and the European Union. The real effective exchange rate is calculated by weighting exchange rates according to the trading proportion with each country. Recently, the Chinese yuan has also been weak and the Japanese yen has weakened, but the won has weakened faster than these. This reflects structural problems in the Korean economy.
Third, the decline in real effective exchange rate can be a signal of weakening export competitiveness. Paradoxically, currency weakening means that demand for that country's products has decreased or capital is flowing out. While price competitiveness improves in the short term, sustainable competitiveness in the long term requires improving technology and brand value.
The decline in real effective exchange rate is not just an exchange rate issue but an indicator revealing problems with economic structure.
✅ Impact of Currency Weakness on Companies
Currency weakness gives short-term benefits to export companies, but can act as a cost burden in the medium to long term.
First, exchange gains for export companies are limited. Large corporations like Samsung Electronics and Hyundai Motor hedge against exchange rate fluctuations. They use forward exchange transactions or currency options to reduce exchange rate risk. Therefore, the actual profits gained even when exchange rates surge are not as large as expected. Rather, increased raw material and component import costs can be a bigger burden. According to research, when the real effective exchange rate falls by 10%, the operating profit margin of large corporations decreases by 0.29 percentage points, meaning the cost increase effect is greater than the export increase effect.
Second, the impact on small and medium-sized enterprises is greater. Large corporations have the capacity to hedge exchange rates, but many small and medium-sized enterprises don't. Also, small and medium-sized enterprises have weak price negotiation power, making it difficult to pass raw material price increases onto product prices. Ultimately, profits can decrease or losses can occur. In fact, the profitability of small and medium-sized manufacturing companies with high raw material import dependence has recently deteriorated significantly.
Third, changes in the global value chain (GVC) structure have an impact. In the past, Korea made finished products and exported them, but now it often imports components, assembles them, and then exports. Apple's iPhone also uses Korean displays and memory, but assembly is done in China. In this structure, the export promotion effect of currency weakness is not as large as before. Rather, costs often just increase in the complex supply chain.
For currency weakness to lead to increased exports, it must be accompanied by industrial structure improvement to be effective.
✅ Conditions for Recovering Purchasing Power
To recover the won's purchasing power, we must go beyond short-term exchange rate defense to increase the economy's fundamental competitiveness.
First, strengthening export competitiveness is key. We must maintain technological superiority in major industries like semiconductors, batteries, and displays, and find new growth engines in future industries like AI, bio, and aerospace. When exports increase, dollars flow in and the won's value naturally rises. Also, we need to diversify export items to reduce dependence on specific industries or regions. Creating a structure less vulnerable to China's economic slowdown or semiconductor cycle fluctuations is important.
Second, we must attract foreign investment. We need to resolve the Korea discount, improve corporate governance, and strengthen shareholder-friendly policies. When foreign investors find Korean companies attractive and increase investment, capital flows in and the won's value rises. Also, we need to modernize financial markets and rationalize regulations to create an investment-friendly environment. Tax systems also need improvement to not disadvantage foreign investors.
Third, reducing the Korea-US interest rate gap is important. Currently, US interest rates are higher than Korea's, so capital is flowing to the US. If the Bank of Korea raises interest rates, it can prevent capital outflow, but this burdens the domestic economy and real estate market. Conversely, we must wait for the US Fed to lower interest rates, but US inflation is not easily controlled, delaying interest rate cuts. Ultimately, the fundamental solution is for the Korean economy to become robust enough to withstand rate increases without hurting the economy.
Recovering purchasing power is impossible with short-term policies alone; it's a long-term task of strengthening overall economic competitiveness.
4️⃣ In Conclusion
The won's purchasing power falling to its lowest since the financial crisis is a warning light revealing the structural vulnerabilities of the Korean economy, beyond simple exchange rate fluctuations.
The figures of a 15% decline in real effective exchange rate and 33.6% undervaluation by Big Mac Index standards signal that our economy is falling behind in fundamental competitiveness. In the past, currency weakness led to increased exports and drove economic growth, but now due to an industrial structure with high raw material dependence, it actually acts as a cost burden.
It also has a direct impact on individual lives. Import prices rise, overseas travel expenses increase, and study abroad costs go up. Ultimately, what you can buy with the same money decreases, which is like a decline in living standards.
Companies are also struggling. While large corporations manage risk to some extent through hedging, small and medium-sized enterprises find it difficult to bear rising raw material costs. Research showing that operating profit margins decrease by 0.29 percentage points when the real effective exchange rate falls by 10% demonstrates that currency weakness is no longer a cure-all.
So what should we do? In the short term, the Bank of Korea can intervene in the foreign exchange market to prevent sharp exchange rate fluctuations. But this alone is not enough. Fundamentally, we must increase export competitiveness, attract foreign investment, and improve productivity.
To increase export competitiveness, we must invest in technological innovation, foster new industries, and work on quality improvement. We need to make products chosen not just because they're cheap, but because they're high quality and technologically advanced.
To attract foreign investment, we must resolve the Korea discount, improve corporate governance, and modernize the investment environment. Managing geopolitical risks and maintaining political stability are also important.
To increase productivity, we must rationalize regulations, encourage innovation, and invest in human capital. We need to create an economic structure that can create more value with the same effort.
Individual-level responses are also needed. We should diversify assets to prepare for exchange rate fluctuations, plan overseas spending carefully, and set investment strategies from a long-term perspective.
Ultimately, recovering the won's purchasing power is a task requiring effort from all citizens. The government must push structural reforms, companies must increase competitiveness, and individuals must make wise choices. What choices we make now will determine the economic situation 5 and 10 years from now.
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