The Economist's 'Big Mac Index' verdict on the NZ dollar

Burgernomics

Politicians and exporters might be at loggerheads over the high NZ dollar, but by one indicator the Kiwi is right where it should be.

The Economist has released its annual Big Mac Index - a fun but supposedly revealing measure of whether currencies are under or overvalued.

It works by comparing the cost of McDonald's signature burger in the US to its price in other countries.

If a Big Mac costs more in your country than the US, your currency is overvalued. A cheaper burger indicates its undervalued.

"It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries," the publication explains.

The Economist reports a Big Mac costs $US4.37 in the US and $US4.32 in NZ - meaning the Kiwi is just 1% undervalued, and one of only a handful of surveyed currencies that is fairly valued.

Last year's Big Mac Index found the NZ dollar 7% undervalued against the greenback.

The publication argues PPP is a good meaure of the "correct" value of a currency because it allows for different labour costs. 

But the Big Mac index also features a figure adjusted for expected burger price weighted for GDP per person. By this measure, the Kiwi is 14.6% overvalued against the US dollar.

The Big Mac Index also measures a basket of currencies against the Euro, against which the Kiwi is 11.3% undervalued.

Against the British pound, the Kiwi is overvalued by 1.8%.

And against the Japanese yen, the Kiwi is overvalued by 23.1%.

The most extreme burgernomics result is against the yuan. According to the Big Mac Index, the Kiwi is 68.1% overvalued against the Chinese currency.

 

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13 Comments & Questions

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Sounds about right to me, even I wonder how organic burgers rate? Could be why The Greens believe our currency should be reduced to banana republic status..

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Wait until Norman becomes our Deputy PM and Finance Minister. He will make sure our dollar is worth 10 US cents.

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A banana republic currency would fit the primary industry economy National's lack of intellect has inflicted on us. Not bananas. Dirty milk instead.

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This does not mean the kiwi dollar is fairly valued, it means the cost of burger in NZ is fairly valued ... look up purchasing power parity [see the Economist's comments on purchasing power parity here: http://www.economist.com/content/big-mac-index?fsrc=scn/tw/te/dc/interac... - Editor].

NZ Big Macs are made from mostly local content beef, etc and NZ is a heavily food producing and exporting nation, 90% of our food produce is excess.. If burgers weren't cheap in NZ there would be something seriously wrong.

NZ dollar is well over-valued by many other measures, let's report on those also shall we?

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So we're around 80 cents to the Australian dollar and they're our major trading partner. Where should that be? Please enlighten me.

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So, the exchange rate is about right, but Kiwi workers are underpaid by about 14.6%? Sounds about right to me

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Ironic when Hamilton Jet are asking for teh exchange rate to drop to 75 US cents. Same company five years ago was saying 75 cents was uneconomic. Maybe a case of not keeping up with the efficiency required to be in business?

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May as well call it the cost of food poison index.

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@ #2 Exactly. Purchasing parity indicates the price of products, not dollars.

What is there to celebrate in a high Kiwi dollar? No one disputes that the only way out for our economy is to trade. Why would we want our high currency - or anything else - to get in the way of that?

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For a start, it's not high. Compared to Australia we are at the lower end of where we normally sit. We cannot ever be where we want compared to every other currency. Currently the US$ is low because of their quantative easing, but even then we're not too high against them by normal standards. The vast majority of us, if not all of us, are better off with a higher dollar rather than a lower one. It is not possible to have a low dollar and a wealthy country. Even exporters rely on imports to conduct their business - even something as basic as petrol, let alone machinery, parts or components, etc - sure, some people don't like it. But they should consider the downside of a weak currency.
Suffice to say NZ is doing incredibly well compared to most of the world. Spend a few months in Britain, Europe or the USA and you won't miss the effects of the credit crunch. Here there is barely a mention. The worst possible thing that could happen is if some busy-body politician tries to 'fix it'. It ain't broken. Just remember it's not possible to always have everything at the top of the cycle.

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I'm definitely not joining in on the chorus calling for a lower Kiwi dollar. If our currency goes down against trading partners, we ALL take a defacto pay cut. Everything we import will become more expensive ... and we now import even everyday staple items, like toilet paper to toothpaste. Our wages are already low enough as it is in relation to our trading partners. If our dollar goes down then everything becomes more expensive and a relative few gain larger returns in NZ$ but face higher costs for everything they import, pushing their costs up anyway.

Whether the dollar goes up or down, the same problem remains: low-wage countries with poor labour and environmental laws can't be competed with unless we also sacrifice things like worker safety and clean air and water. No thanks.

Bring back tariffs. "Free trade" was always a canard. Especially with China, which maintained trade barriers and tariffs while we unilaterally dropped our pants on both 'fronts'.

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Could it be that our uncompetitiveness may be due to the fact that while we import slow-moving under-educated people from the Pacific Islands, our educated and motivated kids are leaving in droves. Your opinions, please. Cheers.

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It would be nice if exchange rates were all at PPP, but that's not how the currency market works. Heaps of other factors, which we can never truly measure because the choices made by buyers and sellers of currency.
If exchange rates followed PPP or even flows of currency in/out due to trade and capital transfers related to the world of global commerce, the floating dollar would be great, or, should I say, better. But as one involved in a small way in the carry trade, I know that the greater flows come from that sort of speculation.
In the last three years I have made one bad bet, quite a lot of good profitable bets and even more that either produced a small loss or a small gain. I am now even again.
I'm small fry, but there are heaps of small fry and some massive big bettors from the banking and currecy market players, such as the famous Sorris.
But to ban all of them from trading currecny shorts and longs means genuine firms like Fonterra, which bets to hedge their risk, which is entirely appropriate, could not do that either.
The market sets the value of currencies unless, like China, a serial currency manipulator, the state just sets what suits them. We did that once and the RBNZ ran out of forex in about 1984-85.

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