CHART OF THE DAY: The iPod And Big Mac Indexes Just Don't Work

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The Economist’s Big Mac Index and the new iPod Nano Index from CommSec are both cute ways of getting attention for the organisations that produce them. But do they really measure anything economically significant?
The idea is that the indexes are supposed to expose the relative under- or over-valuation of various currencies. In theory, the same good should trade at broadly the same price across the globe if exchange rates are adjusting properly. When goods wind up priced very differently in different locations, it suggests something is out of whack.

But a side-by-side comparison of the Big Mac Index and the iPod Nano Index suggests that these might not really be good metrics for measuring currency valuations. As you can see, the two indexes result in wildly uncorrelated results. If it were really a matter of currency valuation, you’d expect both to show similar valuation problems. Instead, the pattern just seems random.

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