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Fast food fact: Kiwi dollar is far too cheap

It’s a familiar complaint, mainly from exporters, that the Kiwi dollar is overvalued. But not according to one long-standing measure: the Economist magazine’s Big Mac Index.

Described as a lighthearted guide to valuing currencies, the latest ranking shows the New Zealand currency is under-valued by 14%.

The Big Mac index is based on the theory of purchasing-power parity (PPP), which says that exchange rates should equalise the price of a basket of goods in each country.

In place of a range of products, the Big Mac index uses just the hamburger, which is sold worldwide. (Another index is based on the Apple iPod, which is also ubiquitous.)

A Big Mac costing $4.90 in New Zealand would cost $US3.08 in the US currency, while the burger itself costs $US3.57 in the US ¬ – making the Kiwi dollar cheaper.

By the Big Mac standards, Asian currencies, such as the Malaysian ringgit and Thai bhat, are also undervalued, as is the Australian dollar, but only by 6%, the same as Canada.

The latter three internationally traded currencies are linked by traders, who view them as commodity influenced.

The most over-valued currencies are in continental Europe. The Swiss franc remains one of the world’s dearest currencies and has been subject to intervention by the central bank to reduce its value.

Similarly, the euro is almost 30% overvalued on the burger gauge. Denmark and Sweden are even less competitive.

The Economist notes some caution in reading the index. The cost of a burger depends heavily on local inputs, such as rent and wages, which are not easily arbitraged across borders and tend to be lower in poorer countries. So PPP gauges are better guides to misalignments between countries with similar incomes.

On that basis, the markets have been kindest to UK exporters. A year ago the pound was overvalued by more than a quarter on the Big Mac gauge. Now it is close to its fair value against the dollar and looks cheap against the euro.

This offers some comfort to tourists going there after years of the pound being over-valued.

View the entire index here.

Comments and questions
2

The link "latest ranking" doesn't connect at The Economist - enter "Big Mac" when you get the error message and then it's fine.

I have replaced the web links to the Economist. As a site mainly for registered users, often these links can go wrong