Ray Hendon’s Economics Blog

From our friends at Economy.com we learn of a new international currency comparator: The IPod index.  From their table below Australia, Indonesia, Canada, and Korea are selling the IPod for less than $140.  Argentina, Brazil and Russia over over $250.  This index gives you a good indicator  of which currencies may decline in the future and which are more likely to rise.

>Just what we needed: A way to track shifts in global purchasing power that fits in your pocket. And is less greasy & caloric than the alternative…

Australia is the cheapest place in the globe to buy an Apple iPod, highlighting just how far the currency has plunged since July. The CommSec iPod index shows that Australia is the cheapest place of 62 countries to buy an Apple iPod 8gb nano music player when measured in US dollar terms.

The value of the iPod index is to highlight implications of currency changes and country relativities.

In other words, it’s an update of The Economist’s Big Mac Index. If you’re clueless, all it takes is a common good or service that’s sold in identical form the world over. The local price is simply converted to a common currency (typically U.S. dollars, though I wonder for how long?) and you can see who’s living how high, in relative terms. Pretty neat.<

Perhaps this is a little better than the Big Mac Index.  It’s more current, and it reflects relative currency valuation more precisely than the Big Mac.  After all, the Big Mac takes a lot of locally prices labor and vegetable prices, as well as local rents.  The IPod is made in America and shipped, whole, to each country where it is sold.  To me, this makes it a more pure reflection of local currency value.

UPDATE: 3/17/09

In retrospect, the IPOD index was a good predictor of currencies about to fall.  Check out the current exchanged rates to those which are listed as overvalued.  There is a strong correlation between the IPOD prediction and the exchange rates today.

The Big Mac Index latest figures: (February, 2009)

These data point to most of the emerging markets from Europe, Asia and Latin America to be undervalued.  If there is a significant economic recovery over the next six months, then these currencies, especially those that appear to be undervalued by over 25%, look to be good bets for revaluation.

These same data can also be interpreted in another way: since almost all of the currencies shown are undervalued, it implies that the U.S. dollar is significantly over-valued.  The comports with the rise of the dollar after the world recession began.  This brought a tremendous capital flight from all the emerging markets and into U.S. Treasury obligations.  The meant that dollars had to be purchased, so the value was pumped up by the flight to quality.

Once confidence is restored to the emerging world economies, the dollar may not do well.  It is likely to take as much a hit when dollars begin flowing back into emerging markets.

Predicting the exact time this will occur is beyond my abilities.  But, I am convinced it will occur within the next year.  The world economy will recover, and confidence in the major trading partners will also be restored.  It is a matter of timing.  Look for the conclusion of the G-20 meeting in early April as the first chance for the restoration stage to begin.