What the cost of a Big Mac tells us about NZ’s dollar
The New Zealand dollar is undervalued, if the cost of purchasing a burger is anything to go by.
The Economist’s Big Mac Index is designed to show how consumers’ purchasing power varies around the world. It divides the price of a Big Mac in one country by the price of a Big Mac in another country to arrive at an implied exchange rate.
If the actual exchange rate is different from that implied exchange rate, it means the currency in question is either over or undervalued.
The latest ‘‘burgernomics’’ update found a McDonald’s Big Mac costs NZ$7.10 in New Zealand and US$5.15 in the United States. That implies an exchange rate of NZ$1.38 to US$1.
The difference between this and the actual exchange rate, US$1 to NZ$1.60, suggested the New Zealand dollar was 14% undervalued.
The index suggested the New Zealand dollar was undervalued 7.1% against the euro and 0.29% undervalued against the British pound.
But it was overvalued by 56.5% against the Japanese yen and 24.5% against the Chinese yuan.
With an adjustment for gross domestic product (GDP), designed to even out differences in things like the cost of labour, the index found a Big Mac costs 14% less in New Zealand (US$4.43) than in the United States (US$5.15) at market exchange rates.
Based on differences in GDP per person, a Big Mac should cost 7.5% less. This suggested the dollar was 7.1% undervalued.
In February, a Big Mac cost NZ$7 and US$5.81, making the implied exchange rate NZ$1.20 to US$1.
But the real exchange rate was NZ$1.52 then, suggesting the New Zealand currency was 20.9% undervalued against USD.
The Economist said the Big Mac Index, which was created in 1986, was a light-hearted guide to gauge if currencies were at their ‘‘correct’’ level.
‘‘Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible,’’ it said.
This month it updated the Big Mac Index to use a McDonald’s-provided price for the United States.
‘‘We also changed our methodology for how we calculate the GDP-adjusted index, the full history of which will now be adjusted whenever the IMF’s historical GDP series are updated,’’ it said.