The Big Mac index has been around since 1986, which essentially compares the price of a basket of the same goods across different countries. Photo / AP
The Big Mac index has been around since 1986, which essentially compares the price of a basket of the same goods across different countries. Photo / AP
The New Zealand dollar is undervalued by more than 20 per cent, according to the theory of "Burgernomics".
The Big Mac index - published by The Economist magazine this week - is a fun gauge of whether a currency is overvalued or undervalued based on the price of the popularMcDonald's burger. The measure has been around since 1986.
As The Economist explains: "It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries."
A Big Mac sells for $5.90 in this country, or US$3.91 on exchange rates from earlier this month. In the USA, Big Macs cost on average for US$4.93 - which means those from McDonald's birthplace get more burger for their buck when visiting this country.
The index is calculated by dividing the US price by the NZ price and the difference compared to the actual exchange rate. And according to it, the New Zealand's dollar is undervalued by 20.6 per cent against the Greenback.
Local exporters will likely disagree strongly with this claim, preferring where the dollar is presently trading (US65.6c) compared with 18 months ago where it bought about US88c.
When adjusting the index for gross domestic product per person, the gap narrows and the Kiwi is undervalued by 12.4 per cent.
Venezuela and Russia are the most undervalued currencies on this year's version of the raw index, and are undercooked by 86.5 per cent and 69 per cent against the Greenback.
