The news-magazineThe Economist regularly publishes data on the so called Big Mac index and exchnage rates between countries. The data for 30 countries from the April 29, 2000 issue is listed below:

Country Currency Price of Big Mac Actual Exchange Rate per US dollar

Indonesia Rupiah 14,500 7,945

Italy Lira 4,500 2,088

South Korea Won 3,000 1,108

Chile Peso 1,260 514

Spain Peseta 375 179

Hungary Forint 339 279

Japan Yen 294 106

Taiwan Dollar 70 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

Mexico 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

Poland Zloty 5.50 4.30

Germany Mark 4.99 2.11

Malaysia Dollar 4.52 3.80

New Zealand Dollar 3.40 2.01

Singapore Dollar 3.20 1.70

Brazil Real 2.95 1.79

Canada Dollar 2.85 1.47

Australia Dollar 2.59 1.68

Argentina Peso 2.50 1.00

Britain Pound 1.90 0.63

United States Dollar 2.51

The concept of purchasing power parity or PPP ("the idea that similar foreign and domestic goods... shouldhave the same price in terms of thesame 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 currency to the U.S. dollar price should equal the exchange rate between the two countries.

a) Calculate the predicted exchnage 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) Using EViews, 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?

c) Plot the actual exchange rate againts the predicted exchange rate. Include the 45 degree line in your graph. Which observations might cause the slope and the intercept to differ from zero and one?