Big Mac index says kiwi dollar rate perfect

MICHAEL FIELD
Last updated 07:32 01/02/2013

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A new edition of a light-hearted guide to the "correct" rate for currencies - The Economist's Big Mac Index - reveals that despite exporters' complaints, the New Zealand dollar is almost perfectly valued against the US dollar.

The magazine's index is based on the theory of purchasing-power parity, 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 average price of a Big Mac in the US at the start of 2013 was US$4.37; in China it was only US$2.57 at market exchange rates. So the "raw" Big Mac index says that the yuan was undervalued by 41 per cent.

This year the index provides details in different currencies and raw data in each used to compile the data.

New Zealand's dollar against the US dollar is currently one per cent undervalued and sits in the middle of the index. The kiwi is worth about US83c.

Against the UK pound it was 1.8 per cent undervalued and against the Euro it is 11.3 per cent undervalued.

Like much of the world, the story is different with China and Japan which currently have policies sharply undervaluing their currencies.

The kiwi against the yuan is 68.1 per cent overvalued and against the yen 23.1 per cent, the Big Mac Index shows.

Other currencies are highly overvalued: Venezuela's Bolivar is 107.9 per cent overvalued against the US dollar and 253 per cent against the yuan.

India's rupee is undervalued 61.8 per cent against the US dollar and 65.8 per cent against the Euro.

"Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible," The Economist said today

"Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies."

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