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Big Macs and New Zealand’s place in the scheme of things

July 21, 2008

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Scoopit!

For some years now The Economist has published the Big Mac Index:-

The Economist’s Big Mac Index, a light-hearted guide to how far currencies are from fair value, provides some answers. It is based on the theory of purchasing-power parity (PPP), which says that exchange rates should equalise the price of a basket of goods in any two countries. Our basket contains just a single representative purchase, but one that is available in 120 countries: a Big Mac hamburger. The implied PPP, our hamburger standard, is the exchange rate that makes the dollar price of a burger the same in each country.

The Economist - 5 July 2008 - Big Mac Index

The Economist - 5 July 2008 - Big Mac Index

Much more over the break

The Economist points out:-

Most currencies are trading a long way from that yardstick. China’s currency is the cheapest. A Big Mac in China costs 11 yuan, equivalent to just $1.45 at today’s exchange rate, which means China’s currency is undervalued by 58%. But before China’s critics start warming up for a fight, they should bear in mind that PPP points to where currencies ought to go in the long run. The price of a burger depends heavily on local inputs such as rent and wages, which are not easily arbitraged across borders and tend to be lower in poorer countries. For this reason PPP is a better guide to currency misalignments between countries at a similar stage of development.

Now what caught Adam’s eye was New Zealand’s position:-

New Zealand on the July 2008 Big Mac Index

Especially when compared to the following countries, all either competitors or potential competitors:-

Big Mac Competitors July 2008

Adam looked also at some of our customers as well:-

BigMac Index July 2008 Customers

The implications Adam takes away, sorry, from this are that the Latin American countries and East European countries with major agricultural potential, such as Poland, present New Zealand with a challenge as major sources of competition and an opportunity for the export of NZ expertise and for long term investment.

Obviously there are other countries as well. One of the major constraints on New Zealand opportunity would appear to be capital. Is there any reason why Kiwisaver funds could not be invested in such ventures?

Looking at the customer side, Adam wonders if the fact that these consuming countries are undervalued against the US$ renders NZ less competitive in those markets, say against Australia? Or do other factors come into play as well.

On the other hand, as he is not an economist, maybe his take on the index signals is wrong?

Scoopit!

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6 Comments
  1. Monica La Madrid permalink
    November 7, 2008 8:18 am

    I have a question: the Big Mac list you are publishing is really the 2007 list, is not? Does anybody have the 2008 list with Venezuela? I hacve not been able to get it.
    Thank you

  2. adamsmith1922 permalink*
    July 22, 2008 1:51 pm

    Thanks, when you get to the savings issue, I have long wondered what the impact of a Central Provident Fund such as those in Singapore, Malaysia and Hong Kong would be?

  3. July 22, 2008 12:00 pm

    “Perhaps you could follow up with some further comments.”

    I have planned to write a series on productivity on the blog for a while, but it has been superseded by the inflation posts. I am part way through a post on the determination of savings, and then I’m going to do a post on the current account. When they are done they will turn up under this tag.

    http://tvhe.wordpress.com/category/productivity-series/

    One day, probably when it is no longer a topical issue, I’ll write some stuff up about it :)

    You are doing a good job keeping the issue going though – good stuff ;)

  4. adamsmith1922 permalink*
    July 21, 2008 5:51 pm

    Matt

    ‘It is also important to think about why we are over-valued. If we have a stronger currency because our export sectors are more productive and our terms of trade is stronger (given the make-up of our export profile) then a higher exchange rate is not a concern.’

    This I understand as a concept, I am not certain that the issue of profile gets through to as many as it should.

    I used to spend a lot of time in the insurance and reinsurance business, so the concept of a balanced book of business is one that makes sense to me. So in this regard we should look to have a balanced profile.

    Part of my concern would be that our export profile is not a balanced one, that within for example an overall primary sector it veers dramatically from corner to another so to speak.

    Then you make another cogent comment:-

    “If our exchange rate is high because we are funding domestic consumption through borrowing, and if we don’t expect to have higher incomes in the future, this would be a problem.”

    Is it not the case that our interest rates are high partly for that reason. I may have missed something here, but given the problems we have with productivity, and the flight of intellectual capital coupled with issues over cultural attitudes to work, are we not in a situation where one could reasonably expect a risk profile of the economy to raise questions in this regard?

    On your third point:-

    “The exchange rate is the result of a process. If our exchange rate is over-valued it is a symptom of domestic economic issue – it is not the issue in of itself.”

    I accept this totally.

    My point with the post was to try and stimulate some broader comment and discussion, as I am of the belief that these matters and many like them need to be brought into the arena of more wider debate.

    I had hoped you would comment and am very appreciative that you took the time to do so.

    Perhaps you could follow up with some further comments.

    Thanks again.

  5. July 21, 2008 4:44 pm

    It is also important to think about why we are over-valued. If we have a stronger currency because our export sectors are more productive and our terms of trade is stronger (given the make-up of our export profile) then a higher exchange rate is not a concern.

    If our exchange rate is high because we are funding domestic consumption through borrowing, and if we don’t expect to have higher incomes in the future, this would be a problem.

    The exchange rate is the result of a process. If our exchange rate is over-valued it is a symptom of domestic economic issue – it is not the issue in of itself.

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