Kiwi dollar gets super-sized

MICHAEL FIELD
Last updated 14:14 28/07/2014
Big Mac
DOLLAR MENU: The Big Mac Index is based on the price of the burger in each country.

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The light-hearted "Big Mac" index is showing New Zealand’s dollar is massively over-valued against several major currencies.

Invented by The Economist in 1986, the Big Mac Index is based on the price of a Big Mac McDonald's burger in each country.

While not to be taken too seriously, it does highlight distortions in the currency market.

When the price of a Big Mac in Beijing and in Auckland is ranked on the index, it shows the kiwi is over-valued by 81.4 per cent against the Chinese yuan.

China controls the value of the yuan internationally.

Against the Japanese yen, the kiwi is over-valued by 35.7 per cent. And against the US dollar it is over-priced by 3.1 per cent but a more modest 0.4 per cent against sterling and 0.2 per cent against the Euro.

The Economist says their 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 any two countries.

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

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