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

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.

NBR staff
Fri, 01 Feb 2013

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