The hamburger standard

Download:  0518.dat ,  0518.xls
 

	Big Mac prices
	In local currency	In dollars	actual $ exchange rate	Implied PPP of the dollar	Local currency valuation
United States	2.3	2.3
Argentina	3.6	3.6	1	1.57	57
Australia	2.45	1.72	1.42	1.07	-25
Austria	34	2.84	12	14.8	23
Belgium	109	3.1	35.2	47.39	-35
Brazil	1500	1.58	949	652	-31
Britain	1.981	2.65	1.46	1.27	15
Canada	2.6	2.06	1.39	1.24	-10
Chile	948	2.28	414	412	-1
China	9	1.03	8.7	3.91	-55
Czech Rep	50	1.71	29.7	21.7	-27
Denmark	25.75	3.85	6.69	11.2	67
France	18.5	3.17	5.83	8.04	38
Germany	4.6	2.69	1.71	2	17
Greece	620	2.47	251	270	8
Holland	5.45	2.85	1.91	2.37	24
Hong Kong	9.2	1.19	7.73	4	-48
Hungary	169	1.66	103	73.48	-29
Italy	550	2.77	1641	1978	21
Japan	391	3.77	104	170	64
Malaysia	3.77	1.4	2.69	1.64	-39
Mexico	8.1	2.41	3.36	3.52	5
Poland	31000	1.4	22433	13748	-40
Portugal	440	2.53	174	191	10
Russia	2900	1.66	1775	1261	-29
Singapore	2.98	1.9	1.57	1.3	-17
S Korea	2300	2.84	810	1000	24
Spain	345	2.5	138	150	9
Sweden	25.5	3.2	7.97	11.1	39
Switzerland	5.7	3.96	1.44	2.48	72
Taiwan	62	2.35	26.4	26.96	2
Thailand	48	1.9	25.3	20.87	-17

     Consider the following regression model:

                 Yi = £]₁+£]₂X_i+u_i

      where Y = actual exchange rate and X = implied PPP of the dollar.

(a)  If the PPP holds, what values of  £]₁ and£]₂ would you expect a priori? (Suggested Answer)

(b) Does the regression support your expectation? (Eviews) (Rats)
     What formal test do you use to test your hypothesis? (Suggested Answer)

(c) Should the Economist continue to publish the Big Mac Index? Why or why not?
     (Suggested Answer)
 
 

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