Big Macs and New Zealand’s place in the scheme of things
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.
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 $1.45 at today’s exchange rate, which means China’s currency is undervalued by 58%. But before China’s critics start warming up for a fight, they should bear in mind that PPP points to where currencies ought to go in the long run. The price of a burger depends heavily on local inputs such as rent and wages, which are not easily arbitraged across borders and tend to be lower in poorer countries. For this reason PPP is a better guide to currency misalignments between countries at a similar stage of development.
Now what caught Adam’s eye was New Zealand’s position:-
Especially when compared to the following countries, all either competitors or potential competitors:-
Adam looked also at some of our customers as well:-
The implications Adam takes away, sorry, from this are that the Latin American countries and East European countries with major agricultural potential, such as Poland, present New Zealand with a challenge as major sources of competition and an opportunity for the export of NZ expertise and for long term investment.
Obviously there are other countries as well. One of the major constraints on New Zealand opportunity would appear to be capital. Is there any reason why Kiwisaver funds could not be invested in such ventures?
Looking at the customer side, Adam wonders if the fact that these consuming countries are undervalued against the US$ 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?