Big Mac index still rates NZ dollar as undervalued

4.00pm

The New Zealand dollar is moving closer to fair value but is still around 8 per cent undervalued, according to The Economist magazine's latest Big Mac index.

The index is slightly tongue in cheek, but the London magazine takes it seriously enough to have run it since 1986. Studies have shown that over the long-run the index is a good indicator of a currency's direction.

A McDonalds Big Mac burger costs US$2.65 ($4.31) in New Zealand against an average US$2.90 in the United States.

Converting the US dollar figure into purchasing power parity (PPP), which takes account of price differences, local burgers are evaluated as 8 per cent cheaper than in the US. That compares with 20 per cent cheaper at the last survey in January 2003 when the kiwi dollar was at US53-54 cents against today's price of US62.5 cents.

The index helps test the theory of purchasing-power parity, by which currencies should in the long term move to equalise prices in different countries, The Economist said. PPP is calculated by dividing the local currency price by the American dollar price.

A Big Mac in Australian costs US$2.27 and the Australian dollar is seen as 22 per cent undervalued.

The cheapest Big Mac can be bought in the Philippines at US$1.23 where the local peso is assessed as 57 per cent undervalued. The most expensive burgers are in Switzerland at US$4.90 and the Swiss franc is assessed at 69 per cent overvalued -- the most overvalued currency of any. The average cost of Big Mac in the euro area is US$3.28 and the euro is assessed as 13 per cent overvalued.

The Economist in January also published a 'tall latte' index which suggested consumers buying a latte in a Starbucks outlet in New Zealand paid 15 per cent less than Americans did at home.

The New Zealand dollar has fallen 4 per cent against the US dollar this year although in mid-February, when it hit US71c, it had made substantial gains.

- NZPA