Wednesday, June 02, 2004
Burgernomics
If you are addicted to McDonalds (you poor soul), you will no doubt realise that they seem to cost a lot more in London or Los Angeles, compared with the exchange rate of Kiwi currency.
This, dear friends, is the basis for the Economist magazine’s "Big Mac� index, which rates currencies around the world on the comparative cost of buying a burger locally.* The idea is you can’t find out much by just converting GDP into market prices for currency – prices tend to be lower in poor countries, as New Zealanders find when buying a coffee in London. Because a buck goes further in Auckland than in London, the Economist uses the identical ingredients of Big Macs as a rough comparison.
On that basis, the New Zealand dollar is under-valued eight per cent against the US dollar.
It found the average price in the US was $2.90. The Philippines has the cheapest burgers, at $1.23 and the Swiss the most expensive -- $4.90. In other words, the Swiss franc is the most overvalued currency and the Philippines has the most under-valued.
Although the comparison puts the NZ dollar low by eight per cent against the US
dollar, we really need to make a comparison against a basket of our major trading partners. Australia comes up 22 per cent undervalued, and Japan 20 per cent under, while Britain comes in 16 per cent over-valued. China (57%) and Malaysia (54) come in hugely under-valued against the Greenback, Taiwan is around the Australian level while South Korea is pretty much on a par with us. Against a full basket of currencies, our dollar still looks pretty high.
It looks like the currencies of almost all the emerging economies are hugely undervalued. When the Economist calculated China’s GDP using its Big Mac index, its economy was two and a half times bigger than a conversion using a market exchange rate, jumping it from the world’s seventh largest economy to its second.
* Note: I am indebted to Molesworth & Featherstone for their summary of this info, and thoroughly recommend you get their weekly email newsletter.
If you are addicted to McDonalds (you poor soul), you will no doubt realise that they seem to cost a lot more in London or Los Angeles, compared with the exchange rate of Kiwi currency.
This, dear friends, is the basis for the Economist magazine’s "Big Mac� index, which rates currencies around the world on the comparative cost of buying a burger locally.* The idea is you can’t find out much by just converting GDP into market prices for currency – prices tend to be lower in poor countries, as New Zealanders find when buying a coffee in London. Because a buck goes further in Auckland than in London, the Economist uses the identical ingredients of Big Macs as a rough comparison.
On that basis, the New Zealand dollar is under-valued eight per cent against the US dollar.
It found the average price in the US was $2.90. The Philippines has the cheapest burgers, at $1.23 and the Swiss the most expensive -- $4.90. In other words, the Swiss franc is the most overvalued currency and the Philippines has the most under-valued.
Although the comparison puts the NZ dollar low by eight per cent against the US
dollar, we really need to make a comparison against a basket of our major trading partners. Australia comes up 22 per cent undervalued, and Japan 20 per cent under, while Britain comes in 16 per cent over-valued. China (57%) and Malaysia (54) come in hugely under-valued against the Greenback, Taiwan is around the Australian level while South Korea is pretty much on a par with us. Against a full basket of currencies, our dollar still looks pretty high.
It looks like the currencies of almost all the emerging economies are hugely undervalued. When the Economist calculated China’s GDP using its Big Mac index, its economy was two and a half times bigger than a conversion using a market exchange rate, jumping it from the world’s seventh largest economy to its second.
* Note: I am indebted to Molesworth & Featherstone for their summary of this info, and thoroughly recommend you get their weekly email newsletter.
