Monday, 3 February 2014

The Big Mac Index

The 2014 Big Mac Index is available from the Economist magazine.
THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. 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. For example, the average price of a Big Mac in America in January 2014 was $4.62; in China it was only $2.74 at market exchange rates. So the "raw" Big Mac index says that the yuan was undervalued by 41% at that time.

According to the Big Mac Index the New Zealand dollar is about right
New Zealand January 2014 Price: $4.57 (NZ$5.50)
Raw index: undervalued by 1.1%
Actual exchange rate: 1.20
Implied exchange rate: 1.19 (Local price divided by dollar price)

So people should stop complaining about the "too high" exchange rate.

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