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?