The Big Mac index produced by The Economist magazine is one of the world's most famous economic indicators, even though it has its origins in a semi-humorous exercise which uses the relative prices of Big Macs around the world to value exchange rates – aptly named Burgernomics.
Note: Burgernomics is based on the theory of purchasing power parity (PPP), the idea that a dollar would buy the same amount in all countries. So in the long run, the exchange rate between two countries should move towards the rate that makes prices of an identical basket of goods and services equal 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 America as any other country. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
View the Big Mac index
Interestingly, something similar has been suggested for the Pacific – by the Secretariat of the Pacific Community – the collection of prices from around the Pacific region for tinned mackerel, appropriately named the PacMack index. You can certainly see some big differences, with the three French Territories coming in at four-five times the level of the lowest price in the region, Samoa.’
View the PacMack index
The Big Mac index illustrates the theory of purchasing power parity (PPP) simply. A much wider and more robust exercise is actually done by national statistical organisations around the world, like Statistics NZ, using PPP data and results for cross-country comparisons of wellbeing and poverty analysis.
Aggregate gross domestic product (GDP) and GDP per capita, are frequently used to assess a country’s economic size and the wellbeing of its residents. To make meaningful cross-country GDP comparisons, prices must first be converted into a common currency, and this is where PPPs come in.
PPPs also assist international markets by identifying different countries’ relative productivity and investment potential.
David Pine, Economic Director at the Ministry of Foreign Affairs and Trade, often uses the 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 Comparisons Project (ICP)* will greatly assist analysis within the Ministry of Foreign Affairs and Trade," David says.
*The ICP is a worldwide statistical undertaking, administered by the World Bank, to collect comparative price data and estimate PPPs for around 150 countries.
New Zealand is one of 55 countries participating in the Eurostat-OECD PPP programme. (Countries participating in the OECD PPP Programme are also part of the wider ICP.)
Statistics NZ prices project manager Daniel Griffiths said this involves collecting prices of around 3,000 goods and services, from a beer at a local pub to the drill used on a construction site, from building a road to accommodation costs, which are used for international comparisons.
“International comparisons increasingly use PPP measures, rather than exchange rates, and the latest PPP measures are generally accepted as the best yet,” Daniel said.
The methodology for comparison has greatly improved in recent years. Geographically similar countries are now grouped together to form ‘rings’ and these rings are then compared with other ring groupings of countries for the final results.
“The last round made comparisons for 146 countries, which is the most that have ever participated. The improved methodology and greater number of participating countries has really increased the accuracy and power of the results,” Daniel said.
The results for both the Eurostat-OECD PPP programme and ICP have been released recently and are available on the OECD and World Bank websites.
Friends of the Chair working group
New Zealand is one of 13 invited countries participating in the International Comparison Programme (ICP) Friends of the Chair working group. The group was commissioned by the United Nations Statistical Commission (UNSC), and includes international agency representatives from the World Bank, International Monetary Fund, OECD, and Eurostat. It was established to evaluate the current ICP scope and activities, and to make a proposal on the desirability of a new round.
At the recent UNSC meeting in New York that Clare Ward, Deputy Government Statistician attended on behalf of New Zealand, the group discussed improvements to the governance structure and the proposed work programme for the next round of the ICP planned for 2011. Milestones for each key element for the governance structure are set to be achieved by the end of December 2009.
Mr. Michel Mouyelo-Katoula, senior statistician for the World Bank, was recently appointed as the ICP Global Manager for the 2011 Round. Michel was the manager of the statistical capacity work and coordinated the 2005 ICP Round at the Africa Development bank.
His top priority is to follow up on the recommendations of the 40th session of the UNSC held in February 2009. For the next few months this will include: setting up the ICP Global Office at the World Bank and establishing its work programme; assisting with the organisation of the new ICP Executive Board and the Technical Advisory Group; and building on the strong ICP network of partners that was established for the 2005 Round to initiate the 2011 Round.
For more information contact: daniel.griffiths@stats.govt.nz.