The 'Big Mac' index produced by The Economist magazine is one of the world's best known economic indicators, even though it has its origins in a semi-humorous exercise that uses the relative prices of Big Macs around the world to value exchange rates – aptly named Burgernomics. Burgernomics is based on the theory of purchasing power parity (PPP), the notion that a dollar should buy the same amount in all countries. So in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country.
The Burgernomics 'basket' is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in the United States as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
Something similar has been suggested for the Pacific by the Secretariat of the Pacific Community – the collection of prices from around the region for tinned mackerel for the PacMack index.
There are some big differences, with the three French territories coming in at 4 to 5 times the level in Samoa – the lowest price in the region.
While the Big Mac index simply illustrates the theory of PPPs, a wider and more robust programme of price comparison is undertaken by national statistical organisations around the world, and results are used in cross-country comparisons of well-being and poverty analysis.
Aggregate gross domestic product (GDP) and GDP per capita are frequently used to assess a country’s economic size, and the well-being of its residents. To make meaningful inter-country GDP comparisons, prices must first be converted into a common currency, and so a robust method of comparison and conversion of prices must be used. This is where PPPs come in.
PPPs also assist international markets by identifying different countries’ relative productivity and investment potential.
David Pine, director of the Economic division at the Ministry of Foreign Affairs and Trade uses PPP data. "Purchasing power parity data is crucial to accurately comparing the economies of different countries, since it allows us to take account of differences in prices around the world. The results from the International Comparison Programme will greatly assist analysis within the Ministry of Foreign Affairs and Trade."
New Zealand, through Statistics New Zealand, is one of 55 countries participating in the Eurostat-Organisation for Economic Cooperation and Development (OECD) PPP programme. This involves collecting prices for around 3,000 goods and services – from a beer at a local pub to the drill used on a construction site, building a road to accommodation costs – which are used for international comparisons.
The countries participating in the Eurostat-OECD PPP programme are also part of the wider International Comparison Program (ICP). The ICP is a worldwide statistical undertaking, overseen by the World Bank, to collect comparative price data and estimate PPPs for about 150 countries.
International comparisons increasingly use PPP measures, rather than exchange rates, and the latest PPP measures, from the 2005 round, are generally accepted as the best yet.
The methodology for the comparisons improved with the 2005 ICP round. Geographically similar countries were grouped together to form ‘rings’, and these rings were then compared with other ring groupings of countries for the final results. The 2005 round made comparisons for 146 countries, far exceeding the number in previous rounds. The improved methodology and greater number of participating countries has increased the accuracy and power of the results.
The 2005 results for both the Eurostat-OECD PPP programme and ICP have been released recently and are available on the OECD and World Bank websites, respectively.
New Zealand is one of 13 invited countries currently participating in the ICP Friends of the Chair (FOC) working group. The group was commissioned by the United Nations Statistical Commission, alongside international agency representatives from the World Bank, International Monetary Fund, OECD, and Eurostat. The group was established to evaluate the current ICP scope and activities, and to consider the desirability of a new round. The FOC supports the continued production and development of PPP measures, and has recommended a further ICP round.
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