5. The Economist regularly publishes data on the so-called Big Mac index and exchange rates between...

   

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5. The Economist regularly publishes data on the so-called Big Mac index and exchange rates between countries. The data for 30 countries from the April 29, 2000 issue is listed below: Price of Actual Exchange Rate Country Currency Big Mac per U.S. dollar 7,945 2,088 1,108 Indonesia Rupiah Lira 14,500 4,500 3,000 1,260 375 Italy South Korea Won Chile Peso 514 Spain Hungary Japan Taiwan Peseta 179 Forint 339 279 Yen 294 70 106 Dollar 30.6 Thailand Baht 55 38.0 Czech Rep. Crown 54.37 39.1 Russia Ruble 39.50 28.5 Denmark Crown 24.75 8.04 Sweden Crown 24.0 8.84 Мexico Peso 20.9 9.41 France Franc 18.5 7.07 Israel Shekel 14.5 4.05 China Yuan 9.90 8.28 South Africa Rand 9.0 6.72 Switzerland Franc 5.90 1.70 Zloty Mark Poland 5.50 4.30 Germany 4.99 2.11 Malaysia New Zealand Dollar Dollar 4.52 3.80 3.40 2.01 3.20 Singapore Brazil Dollar 1.70 Real 2.95 1.79 Canada Dollar 2.85 1.47 Australia Dollar 2.59 1.68 2.50 1.90 1.00 Argentina Britain Peso Pound 0.63 United States Dollar 2.51 The concept of purchasing power parity or PPP ("similar foreign and domestic goods ... should have the same price in terms of the same currency) suggests that the ratio of the Big Mac priced in the local currency to the U.S. dollar price should equal the exchange rate between the two countries. a) Enter the data into R. Calculate the predicted exchange rate per U.S. dollar by dividing the price of a Big Mac in local currency by the U.S. price of a Big Mac ($2.51). b) Run a regression of the actual exchange rate on the predicted exchange rate. If purchasing power parity held, what would you expect the slope and the intercept of the regression to be? Is the value of the slope and the intercept "far" from the values you would expect to hold under PPP? 5. The Economist regularly publishes data on the so-called Big Mac index and exchange rates between countries. The data for 30 countries from the April 29, 2000 issue is listed below: Price of Actual Exchange Rate Country Currency Big Mac per U.S. dollar 7,945 2,088 1,108 Indonesia Rupiah Lira 14,500 4,500 3,000 1,260 375 Italy South Korea Won Chile Peso 514 Spain Hungary Japan Taiwan Peseta 179 Forint 339 279 Yen 294 70 106 Dollar 30.6 Thailand Baht 55 38.0 Czech Rep. Crown 54.37 39.1 Russia Ruble 39.50 28.5 Denmark Crown 24.75 8.04 Sweden Crown 24.0 8.84 Мexico Peso 20.9 9.41 France Franc 18.5 7.07 Israel Shekel 14.5 4.05 China Yuan 9.90 8.28 South Africa Rand 9.0 6.72 Switzerland Franc 5.90 1.70 Zloty Mark Poland 5.50 4.30 Germany 4.99 2.11 Malaysia New Zealand Dollar Dollar 4.52 3.80 3.40 2.01 3.20 Singapore Brazil Dollar 1.70 Real 2.95 1.79 Canada Dollar 2.85 1.47 Australia Dollar 2.59 1.68 2.50 1.90 1.00 Argentina Britain Peso Pound 0.63 United States Dollar 2.51 The concept of purchasing power parity or PPP ("similar foreign and domestic goods ... should have the same price in terms of the same currency) suggests that the ratio of the Big Mac priced in the local currency to the U.S. dollar price should equal the exchange rate between the two countries. a) Enter the data into R. Calculate the predicted exchange rate per U.S. dollar by dividing the price of a Big Mac in local currency by the U.S. price of a Big Mac ($2.51). b) Run a regression of the actual exchange rate on the predicted exchange rate. If purchasing power parity held, what would you expect the slope and the intercept of the regression to be? Is the value of the slope and the intercept "far" from the values you would expect to hold under PPP?

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