1. This question is based on the historical data provided at https://www.economist.com/big-mac-index by The Economist regarding its Big Mac Index.

(a)Select the raw index and examine the over-/under-valuation of the Big Mac in Hong Kong, Russia, and Switzerland relative to the US over the past two decades to assess the empirical validity of The Economist's claim that: "prices should adjust over the long run, so that the same basket of tradable goods costs the same everywhere." Does the data for each of these three countries corroborate the existence of such a trend? Please explain your answer. [8]

Answer:

(b)Select the GDP-adjusted index and examine the over-/under-valuation of the Big Mac in Hong Kong, Russia, and Switzerland relative to the US over the past decade to assess the empirical validity of The Economist's claim that conditional on GDP per capita, "prices should adjust over the long run, so that the same basket of tradable goods costs the same everywhere." Does the data for each of these three countries corroborate the existence of such a trend? Please explain your answer. [8]

Answer: