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The iPod as a Purchasing Power Parity Measure?

4:16 am PHT

I read an interesting business article yesterday saying that an Australian bank has developed a new purchasing power parity index called the iPod Index. We all know about foreign exchange rates. But we also know that just because the U.S. dollar is equivalent to 49 Philippine pesos, does not mean that an apple that sells for 50 cents in California will go for 24.50 pesos in Cebu.

Enter purchasing power parity or PPP. PPP is a method in economics for determining the true value of currencies by measuring their purchasing power through comparison of the price of a select “basket of goods” in their respective economies. As an example of PPP’s use, nominally (i.e., through market exchange rates), the Philippines’ GDP for 2005 is approximately $98 billion. But when seen in terms of PPP, the indicative GDP is actually worth $410 billion. That’s because goods are a lot cheaper here. Apples cost less here than in the States.

So what about Apples not of the fruity kind—the iPods? The problem with PPP is that there is no perfect way to measure a currency’s purchasing power. Well, in 1986, The Economist once proposed—not seriously—McDonald’s Big Mac as the “basket of goods.” It’s surprisingly effective. Now, Commonwealth Securities, based in Sydney, is proposing that the Apple iPod be used instead of the Big Mac.

Let’s see what this means. My 8GB iPod nano which I bought in Japan sells for ¥26,800. The same model costs 15,500 pesos locally. This means that in PPP terms, ¥1 = PhP0.58. Now, since ¥1 = PhP0.40 actually, the iPod Index indicates that the yen is undervalued relative to the peso (or that the peso is overvalued relative to the yen). Market forces then dictate that the yen should appreciate relative to the peso.

If the iPod Index is to be believed, this means that I should hold on to my stash of yen. Over time, the yen will increase in peso value and this is a good thing since I primarily live in the Philippines.

I find this all interesting because its a known fact among Filipinos who go to Japan that everyday consumer goods (including Big Macs) are relatively more expensive in Tokyo, and that most electronic goods (like the iPod) are actually cheaper in Japan. So if I were to stick with the old Big Mac Index, then it says that I should be selling my yen pronto.

From what I can tell, I do think that the peso is somewhat abnormally high in value right now. So I think that the iPod Index has some merit. What do you think?  :)

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Comments

Comment times are in Philippine time (+0800).

1

On 10:11 a.m., 20 Jan 2007, celeni wrote:

That’s cute, but when you think about it, the market of electronic consumer products is very different in Japan compared to Manila. Well, that assumptive contention holds true for the Big Mac as well, and the demand affects the price of the product in a particular area (and the price relatively with other items in the basket of goods).

Assuming we would assume that it’s one global market in different areas, the problem with the rates you compared isn’t that standardised. Even for the iPod Nano in Manila, the prices differ in different shops. Unlike Big Macs, it has a fixed price.  :P

2

On 4:17 p.m., 20 Jan 2007, TheCoffee wrote:

A PS3, already crazily priced in the US at $600, is available in stores here for P60,000–80,000. A Wii, supposedly $250, is available for P30,000.  :(

3

On 1:55 a.m., 21 Jan 2007, seav wrote:

celeni, that’s true. I’m not really suggesting that we take the iPod (or even the Big Mac) index seriously, but it’s fun to take the theory and run away with it with by being armchair economists.  :)

TheCoffee, so if there was a PS3 Index, then it means that the U.S. dollar is undervalued compared to the peso. Hehehe.  :) Good thing I’m not into console gaming so I’m not compelled to shell out big bucks for these, admittedly fun, machines.

4

On 12:12 p.m., 21 Jan 2007, Miguel wrote:

I have also heard of the Starbucks Index. We have it cheaper here than any place I’ve been to recently (excluding Israel, where they went bust.)

But then again, compare the ratio of Starbucks drinks to the daily wage… another metric altogether.

Oh, I’m an iPod Luddite. I don’t have one, and have no plans!

5

On 2:16 p.m., 23 Jan 2007, drei wrote:

this is interesting, but i guess to some extent. the ipod could only represent a fraction of the electronic industry.  :)

but really interesting way of looking at things. hehe  :)

6

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