The latest Big Mac Index

From The Economist magazine comes their latest iteration of the Big Mac Index:

On the raw data version, shown above, the New Zealand dollar is 23.2 per cent under-valved.

If we adjust the index to account for GDP per person we see that the New Zealand dollar is 9.9 per cent under-valved.

The Big Mac index

The Economist’s Big Mac index gives a flavour of how far currency values are out of whack. It is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same everywhere. Our basket contains only one item, but it is found in around 120 countries: a Big Mac hamburger.

If the local cost of a Big Mac converted into dollars is above $5.28, the price in America, a currency is dear; if it is below the benchmark, it is cheap. The average cost of a Big Mac in the euro area is €3.95, or $4.84 at the current exchange rate. That implies the euro is undervalued by 8.4% against the dollar.

The New Zealand dollar looks a bit cheap.

The Big Mac index 2016

From the Economist magazine comes the 2016 Big Mac Index:

While it is not shown in the graphic above if you look at the more detailed version of the raw index you find that the New Zealand dollar is undervalued by 16.2% when compared to the US dollar but is overvalued by 7.1% when compared to Sterling. Adjust for GDP per person and the New Zealand dollar is undervalued by 1.1% when the base currency is the US dollar compared to being overvalued by 14.1% when the base currency is Sterling.

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.

Big Mac index

A new interactive Big Mac index is available from the Economist magazine here.

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 July 2013 was $4.56; in China it was only $2.61 at market exchange rates. So the "raw" Big Mac index says that the yuan was undervalued by 43% at that time.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index.

This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today's equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation.

By this measure the New Zealand dollar is undervalued by 5.7%.