Big Mac Index: NZ dollar undervalued

MICHAEL FIELD
Last updated 07:38 27/07/2012
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PURCHASING POWER: The Economist's Big Mac Index says the NZ dollar is undervalued.

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A financial index based on the price of a McDonald's Big Mac has shot down the long complaint of exporters that the New Zealand dollar is overvalued.

The annual Economist magazine's Big Mac Index, published today, shows the kiwi dollar is around 10 per cent undervalued.

Back in 2007 - the last time the index was compiled - the kiwi was around eight per cent overvalued.

It is the magazine's first revision of the Big Mac index since the global financial crisis started in 2007.

The index is based on the theory of purchasing-power parity, which says that exchange rates should eventually adjust to make the price of a basket of goods the same in each country. For this index, the Economist uses a Big Mac as its basket good.

Using current exchange rates, it works out what a Big Mac costs in each country in US dollars.

In New Zealand they give the value at $4, which puts it almost in the middle of the range.

At current exchange rates a Big Mac, which sells for $4.33 in America, costs just $2.29 (75 roubles) in Russia, and in Brazil it sells for just under $5 (10 reais).

"So the dollar buys a lot of burger in Russia, signalling that the rouble is cheap and the real rather pricey," the magazine says.

It points to some big shifts since 2007.

The Venezuelan bolivar has moved from one per cent overvalued to 83 per cent overvalued thanks to high inflation and a static currency peg with the dollar which is creating a growing trade imbalance with America.

The Australian dollar has moved from being 14 per cent undervalued to 8 per cent overvalued.

"The British pound is now undervalued: its financial industry, a big chunk of the overall economy, was at the heart of the recent turmoil (the pound depreciated sharply in 2008) and its biggest export market, the eurozone, is in a dreadful mess," the magazine says.

The New Zealand dollar is currently worth 80 US cents, 77 Australian cents, 65 euro cents or 51 British pence.

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