CommSec today launched an iPod Index which compares the price of iPod nanos around the world to determine whether exchange rates are over or under-valued. It is, of course, based on the Big Mac Index but it is a poor substitute for the iTunes Index (both music and games) developed on my blog.

There are two reasons why the iPod index won’t work as well. First, it is tradable (unlike the Big Mac or iTunes). So we would expect convergence to one price. That we don’t get that says nothing about exchange rates. Second, there are many reasons why there won’t be convergence, including freight costs but also the consumer value of a iPod which will differ from country to country related to factors other than the iPod.

The iTunes Index suffers from neither of these issues. It is non-tradable and so the prices purely reflect demand conditions. Second, it is unrelated to cost drivers save for copyright practices although these do not reflect real resource issues.

Here are some links to previous posts:

By the way, the iTunes Index predicts a much larger rise in the US dollar than the iPod Index. Time will tell I guess.

Joshua Gans blogs at CoreEcon.

Peter Fray

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