The iPod index

Updated: Jan 23 2007, 05:30am hrs
The Apple iPod has entered the hallowed portals of globalisation greatness. So universal has this music device been adjudged in its appeal, that its price is being used to form the basis of a purchasing power parity index (with a basket of one) to measure the real value of international currencies. Of course, its been done before. The Economist runs what it calls the Big Mac Index, which has gained a loyal following of burgernomists over its two decades of existence. It operates on the principle that the exchange rate of one currency into another ought to be precisely that which can purchase an identical product in both markets. There is one big problem with this, and not only to do with the adipose accumulation of anyone testing it out globally. The Big Mac index is not universal. McDonalds in India serves no Big Mac, and unless the Maharaja Mac acts as a proxy, this index suffers from this flaw.

Welcome, therefore, the iPod index. Its originator, the Australian Commonwealth Bank, claims that it is better because iPods are traded internationally. It goes without saying, too, that music is far more universal than burgers, with or without beef. Whats more, the input costs of burgers vary across the world, an infirmity that the iPod doesnt suffer from, even if taxes, scarcity premia and so on go against its claim to price uniformity. Nonetheless, the iPod index turns our notions of currency values upside down. Going by iPod prices, only three of 26 currencies are undervalued in relation to the US dollarthe Hong Kong dollar, Canadian dollar and Japanese Yenand the dollar ought to rise against most currencies. The Chinese yuan, for example, is overvalued by as much as 20% against the US dollar. The Big Mac Index, in contrast, shows Chinas currency undervalued by 56%. So you know which of the two brands might get to be the official soul-food at the Olympics. Indian exporters can also adopt the clickwheel in navigating their future: the rupee is overvalued by as much as 49% against the dollar, so it should fall. But then, the iPod index is only another imperfect indicator.