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January 18, 2007
Move over, Big Mac Index...
Now there is an iPod index (Reuters). It is based on the same idea as The Economist's Big Mac Index.
One of Australia's biggest banks, the Commonwealth Bank, has used the latest version of Apple's music player -- the slimline Nano -- to compare global currencies and purchasing power in 26 countries.
Along the lines of the Big Mac index launched 20 years ago by The Economist magazine, the survey prices the 2GB Nano in U.S. dollars and found Brazilians pay the most for an iPod, shelling out $327.71, well above second-placed India at $222.27.
Canada was the cheapest place to buy a Nano at $144.20, while Australia ranked 19th at $172.36, cheaper than Germany ($192.46), France ($205.80), South Korea ($176.17) and China where the machine is manufactured. The U.S. was fourth cheapest at $149.
"Interestingly, especially with freight costs close to zero, China is middle ranked in terms of global prices at US$179.84," Craig James, the Chief Equities Economist at Commonwealth Bank, told Reuters.
You know what comes next, don't you?
James said the results suggested the U.S. currency had scope to rise against a range of major currencies except for the Hong Kong and Canadian dollars or the Japanese yen.
If this story was being read on SNL's Weekend Update, the "laughter" sign would be flashing about now.
However, the results could be influenced by different pricing policies that Apple might apply in different parts of the world, James said.
Ya think?
Ok. It's a clever idea and a good discussion starter, but not a serious test of purchasing power parity. In fact, it makes the Big Mac Index look methodologically sensible by comparison.
But if you tell people that you've got a test of purchasing power parity based on the iPod, people will stand up and take notice. It is clever, but don't take it too seriously.
To their credit though, it will be interesting to watch what happens to the index over time (more for what it will tell us about Apple and how they operate in each of these countries than for what it says about purchasing power parity, however).
UPDATE: Surfing around, I found this from three years ago. (Guardian Unlimited January 8, 2004)
Apple Computer is set to review the UK pricing of its iPod mini music player, launched on Tuesday, after complaints about a substantial mark-up for non-US buyers of the device.
The iPod mini will go on sale next month in the US for $249 - which would translate to a UK price of £162 including VAT if today's exchange rates were applied. Yet Apple's UK arm announced on Tuesday that it plans to sell the device for £38 more, at £199, immediately sparking an outcry from the company's European customers.
Now a senior Apple executive has said the company will review its pricing outside the US, and blamed the high pricing on the continuing weakness of the dollar against other currencies.
In an interview, Apple vice president Greg Joswiak told Online the price announcement was "subject to change" and that the company would settle on a UK price "closer to the availability date, simply because of the volatility of the currency exchange".
The exact pricing would depend on the strength of dollar relative to the pound, he said. "What we don't want to do is lock Europe into a price now, see the dollar continue to weaken, and have done all of ourselves a disservice by pricing too early," said Mr Joswiak.
Here is the $/pound exchange rate for the period between the time of this article and the present.
When predicting exchange rates, the most important thing is to be correct about whether the rate ends up above or below where the market (forward or futures) is predicting. Why? Because that determines whether you take a long or short position. In this pricing problem, the position you take is whether to price above or below what current market conditions imply (assuming that this price is sticky). Let's say they re-evaluated their position a year later. Did they get it right? Looking at exchange rates in 2005, you would say no. The iPod would appear to have been overpriced.
Indeed that was the case as we see in The Register in February 2005:
Tacitly acknowledging that the color iPod Photo was overpriced, Apple lopped $150 off the price of the high end 60GB model, which is now $449 (UK:£309), and replaced the $499 40GB iPod Photo with a 30GB version that's also $150 cheaper (UK:£249). The cheapest 4GB iPod Mini is now $199 (UK:£139), a price cut of $50. It's joined by a 6GB model at the old price of $249 (UK:£169). The UK prices quoted include VAT.
In fact, somewhere along the line it was cut from 199 pounds to 169 pounds (the U.S. price in early 2004) before dropping to 139 pounds.
Applying today's exchange rate to the Reuters story implies that the UK price is somewhere around 100 pounds. I saw a website advertising it for 128 pounds. Perhaps either the iPod index doesn't include the VAT (I would think that it would though) or it was based on exchange rates a few months ago when the dollar was a bit stronger than it is today (seems more likely).
Given that Apple has at least once in the last couple years been chasing changes in the exchange rate, it seems reasonable to suggest that the iPod index's indication of an undervalued dollar is more likely to be a sign that Apple will be adjusting its pricing policies than a sign that the dollar is likely to rise. I doubt that is what Commonwealth Bank had in mind when they constructed the index.
CLARIFICATION: The iPod Mini referenced in the older articles has been discontinued in favor of the newer iPod Nano. It is the closest comparison. Since the introduction of the Nano, similar stories of price cuts in the U.K. are readily found.
Posted by William Polley at January 18, 2007 1:28 AM
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