New Index uses PPP to value currencies

The economic law of purchasing power parity (PPP) dictates that price levels and exchange rates should move in opposite directions. Stated another way, when a currency appreciates, its prices should decline proportionately so that the net effect on prices is zero. Methods for measuring PPP-let alone testing it- are imprecise. Recently, an Australian bank has capitalized on the success of The Economist’s Big Mac index and merged it with one of the most popular consumer electronics, the Apple iPOD. The result is the iPOD index, which uses the retail price of an iPOD in different countries as a basis for assessing relative currency valuation. The upshot for forex traders is that the USD inferred to be undervalued, since the US price of an iPOD is among the lowest in the world. The Financial Express reports:

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…the US was fourth cheapest at $149.

Read More: The iPod as currency markets index