514 339 The news-magazine The Economist regularly publishes data on the so called Big Mac index and exch 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 Macper U.S. dollar Indonesia Rupiah 14.500 7.945 Italy Lira 4.500 2.088 South Korea Won 3,000 1.108 Chile Peso 1.260 Spain Peseta 375 179 Hungary Forint 279 Yen 294 106 Taiwan 70 30.6 Thailand Baht 35 38.0 Czech Rep Crown 5437 39.1 Russia Ruble 39.50 285 Denmark Crown 24.75 8.04 Sweden Crown 24.0 8.84 Mexico Peso 20.9 9.41 France Franc 185 -07 Shekel 145 4.05 China Yuan 9.90 South Africa Rand 9.0 6.72 Japan Dollar Israel 28 4 Zloty 5.90 5.50 4.99 1.70 4.30 2.11 3.30 2.01 1.70 Switzerland Franc Poland Germany Mark Malaysia Dollar New Zealand Dollar Singapore Dollar Brazil Real Canada Dollar Australia Dollar Argentina Peso Britain Pound United States Dollar 1.79 3.40 3.20 2.95 2.85 2.59 2.50 1.90 2.51 1.68 1.00 0.63 The concept of purchasing power parity or PPP ("the idea that similar foreign and domestic goods .... have the same price in terms of the same currency." Abel, A. and B. Bernanke, Macroeconomics, 4th edition. Boston: Addison Wesley, 476) suggests that the ratio of the Big Mac priced in the local cure U.S. dollar price should equal the exchange rate between the two countries. (a) Enter the data into your regression analysis program (EViews, Stata, Excel, SAS, etc.). Calculate predicted exchange rate per U.S. dollar by dividing the price of a Big Mac in local currency by the U. of a Big Mac (52.51) (b) Run a regression of the actual exchange rate on the predicted exchange rate. If purchasing power held, what would you expect the slope and the intercept of the regression to be? Is the value of the sk interceptar" from the values you would expect to hold under PPP? (c) Plot the actual exchange rate against the predicted exchange rate. Include the 45 degree line in you Which observations might cause the slope and the intercept to differ from zero and one! 514 339 The news-magazine The Economist regularly publishes data on the so called Big Mac index and exch 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 Macper U.S. dollar Indonesia Rupiah 14.500 7.945 Italy Lira 4.500 2.088 South Korea Won 3,000 1.108 Chile Peso 1.260 Spain Peseta 375 179 Hungary Forint 279 Yen 294 106 Taiwan 70 30.6 Thailand Baht 35 38.0 Czech Rep Crown 5437 39.1 Russia Ruble 39.50 285 Denmark Crown 24.75 8.04 Sweden Crown 24.0 8.84 Mexico Peso 20.9 9.41 France Franc 185 -07 Shekel 145 4.05 China Yuan 9.90 South Africa Rand 9.0 6.72 Japan Dollar Israel 28 4 Zloty 5.90 5.50 4.99 1.70 4.30 2.11 3.30 2.01 1.70 Switzerland Franc Poland Germany Mark Malaysia Dollar New Zealand Dollar Singapore Dollar Brazil Real Canada Dollar Australia Dollar Argentina Peso Britain Pound United States Dollar 1.79 3.40 3.20 2.95 2.85 2.59 2.50 1.90 2.51 1.68 1.00 0.63 The concept of purchasing power parity or PPP ("the idea that similar foreign and domestic goods .... have the same price in terms of the same currency." Abel, A. and B. Bernanke, Macroeconomics, 4th edition. Boston: Addison Wesley, 476) suggests that the ratio of the Big Mac priced in the local cure U.S. dollar price should equal the exchange rate between the two countries. (a) Enter the data into your regression analysis program (EViews, Stata, Excel, SAS, etc.). Calculate predicted exchange rate per U.S. dollar by dividing the price of a Big Mac in local currency by the U. of a Big Mac (52.51) (b) Run a regression of the actual exchange rate on the predicted exchange rate. If purchasing power held, what would you expect the slope and the intercept of the regression to be? Is the value of the sk interceptar" from the values you would expect to hold under PPP? (c) Plot the actual exchange rate against the predicted exchange rate. Include the 45 degree line in you Which observations might cause the slope and the intercept to differ from zero and one! 514 339 The news-magazine The Economist regularly publishes data on the so called Big Mac index and exch 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 Macper U.S. dollar Indonesia Rupiah 14.500 7.945 Italy Lira 4.500 2.088 South Korea Won 3,000 1.108 Chile Peso 1.260 Spain Peseta 375 179 Hungary Forint 279 Yen 294 106 Taiwan 70 30.6 Thailand Baht 35 38.0 Czech Rep Crown 5437 39.1 Russia Ruble 39.50 285 Denmark Crown 24.75 8.04 Sweden Crown 24.0 8.84 Mexico Peso 20.9 9.41 France Franc 185 -07 Shekel 145 4.05 China Yuan 9.90 South Africa Rand 9.0 6.72 Japan Dollar Israel 28 4 Zloty 5.90 5.50 4.99 1.70 4.30 2.11 3.30 2.01 1.70 Switzerland Franc Poland Germany Mark Malaysia Dollar New Zealand Dollar Singapore Dollar Brazil Real Canada Dollar Australia Dollar Argentina Peso Britain Pound United States Dollar 1.79 3.40 3.20 2.95 2.85 2.59 2.50 1.90 2.51 1.68 1.00 0.63 The concept of purchasing power parity or PPP ("the idea that similar foreign and domestic goods .... have the same price in terms of the same currency." Abel, A. and B. Bernanke, Macroeconomics, 4th edition. Boston: Addison Wesley, 476) suggests that the ratio of the Big Mac priced in the local cure U.S. dollar price should equal the exchange rate between the two countries. (a) Enter the data into your regression analysis program (EViews, Stata, Excel, SAS, etc.). Calculate predicted exchange rate per U.S. dollar by dividing the price of a Big Mac in local currency by the U. of a Big Mac (52.51) (b) Run a regression of the actual exchange rate on the predicted exchange rate. If purchasing power held, what would you expect the slope and the intercept of the regression to be? Is the value of the sk interceptar" from the values you would expect to hold under PPP? (c) Plot the actual exchange rate against the predicted exchange rate. Include the 45 degree line in you Which observations might cause the slope and the intercept to differ from zero and one! 514 339 The news-magazine The Economist regularly publishes data on the so called Big Mac index and exch 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 Macper U.S. dollar Indonesia Rupiah 14.500 7.945 Italy Lira 4.500 2.088 South Korea Won 3,000 1.108 Chile Peso 1.260 Spain Peseta 375 179 Hungary Forint 279 Yen 294 106 Taiwan 70 30.6 Thailand Baht 35 38.0 Czech Rep Crown 5437 39.1 Russia Ruble 39.50 285 Denmark Crown 24.75 8.04 Sweden Crown 24.0 8.84 Mexico Peso 20.9 9.41 France Franc 185 -07 Shekel 145 4.05 China Yuan 9.90 South Africa Rand 9.0 6.72 Japan Dollar Israel 28 4 Zloty 5.90 5.50 4.99 1.70 4.30 2.11 3.30 2.01 1.70 Switzerland Franc Poland Germany Mark Malaysia Dollar New Zealand Dollar Singapore Dollar Brazil Real Canada Dollar Australia Dollar Argentina Peso Britain Pound United States Dollar 1.79 3.40 3.20 2.95 2.85 2.59 2.50 1.90 2.51 1.68 1.00 0.63 The concept of purchasing power parity or PPP ("the idea that similar foreign and domestic goods .... have the same price in terms of the same currency." Abel, A. and B. Bernanke, Macroeconomics, 4th edition. Boston: Addison Wesley, 476) suggests that the ratio of the Big Mac priced in the local cure U.S. dollar price should equal the exchange rate between the two countries. (a) Enter the data into your regression analysis program (EViews, Stata, Excel, SAS, etc.). Calculate predicted exchange rate per U.S. dollar by dividing the price of a Big Mac in local currency by the U. of a Big Mac (52.51) (b) Run a regression of the actual exchange rate on the predicted exchange rate. If purchasing power held, what would you expect the slope and the intercept of the regression to be? Is the value of the sk interceptar" from the values you would expect to hold under PPP? (c) Plot the actual exchange rate against the predicted exchange rate. Include the 45 degree line in you Which observations might cause the slope and the intercept to differ from zero and one