Find below the a new note from COMSEC arguing that its Ipad Index shows the Australian dollar is fairly or even under-valued. As the study itself says, the problem with comparisons such as this is that they underplay all sorts of market factors in pricing. This simple fact is illustrated in the study, which shows that Australia’s IPAD purchasing power position in the rankings has jumped over the past year as its currency fell heavily. It is also more widely demonstrable in the high growth rate of offshore online purchases by Australian consumers, who are finding all sorts of much cheaper goods internationally.

A better way to assess the currency is the real effective exchange rate which includes inflation in the measure and shows that the Australian dollar remains miles overvalued, especially relative to other developed economies with which we compete.

Australia is one of the cheapest places in the world to buy a new iPad according to the latest CommSec iPad index. On current exchange rates Australia is the 4th cheapest across 46 countries to buy a 16gb iPad with Retina display, behind Malaysia, Hong Kong and Japan. The latest survey raises questions about whether the Aussie dollar is as over-valued as many analysts believe. In July, when the Aussie was near US93c, The Economist Big Mac index suggested the Aussie was relatively fairly valued.

In January 2007 CommSec launched its iPod index as a modern way of looking at purchasing power theory. That is, the theory that the same good should be sold for the same price across the globe once taking into account exchange rates.

Over time we have modified the index to keep pace with changes in products such as the iPod touch, iPad2 and the “new iPad” – iPad with Retina display. This update looks at the pricing of the iPad with Retina display in 46 countries.

A year ago with the Aussie dollar at US$1.05, Australia was the 15^th cheapest place to buy an iPad with Retina display. Today, with no change in the local iPad price ($539) and the Aussie dollar near US94 cents, Australia is the 4^th cheapest.

What do the index results show?
In January 2007, CommSec launched its iPod index. It was designed as a new way of looking at purchasing power theory. That is, the theory that the same good should be sold for the same price across the globe once taking into account exchange rates. The Economist magazine has for some time maintained its Big Mac index for the same purpose – that is, tracking the concept of purchasing power parity.

CommSec still maintains the iPod index with the multimedia device now freely available worldwide. But it is the Apple iPad that now dominates attention together with the iPhone. Unfortunately it is more difficult to track pricing of the iPhone given the complications of telecommunication charges and bundling deals by telcos.

But the good news for Aussie consumers is that – with the weaker exchange rate – Australia is still one of the cheapest places in the world to buy the latest tech gear from Apple.

Of the 46 locations surveyed, Australia is the 4^th cheapest place to purchase an iPad with Retina display (16gb wi-fi) behind Malaysia, Hong Kong and Japan. Sales tax rates provide complications in undertaking comparisons across countries, especially Canada and the US. But we have undertaken comparisons with Montreal in Canada and California in the US.

The latest CommSec iPad index shows that Latin American and northern European countries pay the most for their tech devices. In fact Argentinian customers pay the equivalent of $US1,094.11 for the iPad with Retina display compared with US$506.66 in Australia.

On current exchange rates Malaysia is the cheapest place in the world to buy a new iPad at US$473.77, over US$30 (A$33) or 6.5 per cent cheaper than in Australia. Hong Kong is next cheapest at US$501.52 and Japan at US$501.56.

In Canada the list price for an iPad is the equivalent of US$484.61 and in the US the list price is US$499. But those prices are before sales tax is applied. The Apple store “check out” price for an iPad in Montreal is the equivalent of US$557.18 with tax and in California the price is US$546.91, compared with US$506.66 in Australia.

Purchasing power parity: In theory only
While the concept of purchasing power parity is good in theory, unfortunately there are complications in practice. One of the biggest complications is tax. In Hungary the new iPad seems expensive, but it must be remembered that a 25 per cent value added tax (VAT) is applied. The same rate applies in Denmark. In the US, some states don’t apply a sales tax, but in California with the highest sales tax rate of 8.25 per cent, an iPad with Retina display would be over US$40 more expensive than in Australia.

The other complication with purchasing power parity is freight or shipping cost. Still, if the local price was relatively high and shipping costs weren’t overly exorbitant then a buyer may decide to source goods from another country. If enough buyers were to source goods abroad, presumably it would force local retailers to re-assess pricing.

Australia is one of the cheapest again
Since we began the CommSec iPod index in January 2007, Australia has always been one of the cheapest places in the globe to buy an iPod nano media player. In fact Australia was the cheapest place to buy the popular media player in both October 2008 and December 2009.

Changes in Australia’s relative position reflect the appreciation of the Australian dollar as well as local pricing by Apple. The important point is that local retailers and suppliers face the same dilemma as Apple – when currencies change, how quickly should local pricing change? And if you do change selling prices, do you fully adjust for the currency impact? There is a range of influences that play a part in the decision, including a judgement about whether the currency change is likely to be permanent or temporary.

On-line shopping sites and the power of travel are putting pressure on Australia retailers to remain competitive. If local pricing isn’t responsive to exchange rate changes then Aussie shoppers will increasingly look overseas to purchase imported items.

The need to keep track of local pricing is highlighted by the CommSec iPad and CommSec iPod indexes. It would appear logical that Australia’s position on the indexes was reasonably consistent. Last year with the Aussie dollar near US$1.05, Australia was the 15^th cheapest place to buy an iPad with Retina display. Today Australia is the 4^th cheapest to buy the Apple tablet.

Big Mac index, and exchange rates
CommSec has maintained its iPod index since January 2007 as a way at looking at issues such as the impact of currency changes on consumer spending, globalisation and retailer margins. With relative importance switching from iPods to iPads, CommSec also started compiling iPad indexes.

The CommSec iPod and iPad indexes are designed as modern day variants of the long-running Big Mac index compiled by The Economist magazine. Both the iPad and Big Mac indexes work on the theory of ‘same good, same price’. That is, the same good should trade at broadly the same price across the globe if exchange rates are adjusting properly.

The Economist uses its Big Mac index to track the economic theory of purchasing power parity (PPP). That is, the theory that the same good should trade for the same price across the globe once adjusted for exchange rates. The index works by dividing the local price of a Big Mac by the US price of a Big Mac. This gives the PPP exchange rate. If the actual exchange rate is above the PPP rate, the theory says that the currency is over-valued, and may need to fall to bring the goods in both countries in line.

The problem is that Big Macs aren’t exchanged across country borders. But the assumption is that Big Macs are a proxy for other goods that certainly may be traded. The other problem is that the Big Mac index assumes a US base, and thus assumes that US goods are appropriately priced.

The latest Big Mac index (July 2013) concluded that a range of currencies were over-valued against the greenback including those from Switzerland, Norway, Brazil and Canada. The Euro, US dollar and Aussie dollar were considered fairly valued but a raft of other currencies were under-valued including those from India, South Africa, Hong Kong and Malaysia.

CommSec iPad and CommSec iPod indexes and exchange rates
The CommSec iPad and CommSec iPod indexes also assume that the same good should sell for the same price across the globe once exchange rates are taken into account. But the difference with the Big Mac index is that Apple tech devices can indeed be exchanged across the globe. If they are particularly cheap in one country it could cause tourists to buy their tech devices when on holiday, prompt people to them on-line in other countries, or prompt some companies to take advantage of arbitrage opportunities.

But iPods and iPads are manufactured in one place (China – mainland China as well as Taiwan) and sold across the globe. So it won’t just be the cost of the good that could result in price differences across the globe but also local taxes, freight and different mark-ups.

But if you assume that the Aussie price for an iPad with Retina display should be the same price as that paid by a resident in California, then the exchange rate would need to be at US100 cents rather than just under US94 cents.

Alternatively, if you assume that the Aussie price for an iPad with Retina display should be the same as China where the goods are manufactured, the appropriate level of the Aussie dollar would be US90 cents. But this raises the question about whether the Aussie is too dear or that the Chinese yuan is too cheap.

What are the implications for interest rates and investors?
The CommSec iPad index and CommSec iPod indexes are useful in highlighting the globalisation of retail shopping and the powerful role occupied by currency changes. Australia is now the 4^th cheapest place to buy an iPad (16gb, wi-fi) device. Just over a year ago, Australia was the 15^th cheapest, suggesting that Aussie buyers were better off purchasing the highly valued tech device overseas. At that time travellers to many Asia destinations such as Singapore, Indonesia, Hong Kong and Malaysia could have enjoyed substantial savings by purchasing an iPad with Retina display while they were away on business or holidays.

Last year we suggested that the Aussie dollar was around 5 per cent overvalued against the US dollar. At the same time The Economist magazine, via its Big Mac index found the Aussie dollar to be 8 per cent over-valued against the greenback. Today, the Aussie dollar is 10 per cent cheaper against the greenback.

Is the Aussie dollar now under-valued? That observation is out of kilter with the general view. And certainly the Reserve Bank still believes that the Aussie dollar remains historically high. Both e CommSec iPad and The Economist Big Mac indexes would suggest that the Aussie dollar is about right – relatively fairly valued.

Australian retailers had been under substantial pressure from consumer conservatism and a strong Aussie dollar. The easing of the currency from May has eased some of those pressures. Still, retailers must constantly keep track of local and overseas pricing, new foreign suppliers offering low shipping costs and exchange rate movements.

While Australia is currently one of the cheapest places to buy key Apple devices, as CommSec has demonstrated with the iPad and iPod indexes, if pricing is not responsive to currency changes then opportunities to purchase abroad quickly open up.