1. Download the excel file on the course website. The data were taken from the W
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Question
1. Download the excel file on the course website. The data were taken from the World Eco nomic Outlook (WEO) database and from The Economist's Big Mac data2 from January, 2016. The data set contains information regarding several indicators for a sample of 17 OECD countries. The first column specifies the country. The second column contains the price of the big mac in local currency. The third column informs exchange rate (local cur- rency per US dollar), whereas the fourth and fifth columns provide the GDP (in billions of domestic currency) and population (in millions of people) in 2014, respectively (a) What information does the Big Mac price in different nations give us? Why is it true that the Big Mac index gives us a better understanding of differences in income levels across nations than exchange rates? (b) Compute the PPP conversion factor using the Big Mac Index. For how many countries do you get a number greater than 1? Which ones? What can this tell us about the price levels in these countries? (c) Compute the GDP per capita using the PPP conversion factor you found in the previous item. Compare the disparity of income per capita in this sample of countries. What is the richest country? What country is at the bottom of the income distribution? What is the difference in income per capita between these two countries? (d) Now create a dummy variable indicating whether the country belongs to the European continent. Can you conclude that European countries are richer than non-European economies? (Here you need to regress GDP per capita as a function of the indicator variable you created and analyze the result you found.) (e) Why should we be careful about the causal interpretation in the previous item?Explanation / Answer
a) What information does the big Mac price in different nation gives us.
The Big Mac price is gives us to purchasing power parity of two currenciesand provides a taste of the extent to which market exchange rates result in goods costing and same in different countries. It" seeks to make Exchange rate theory a bit more digestible".[1]
The Big Mac choose and because it is available to common specifications in many countries around the world local McDonald's franchise is at least in theory having significant responsibility for negotiating input prices. For these reasons the index enable a comparison between many countries currencies. The value of Big Mac price is compared with actual exchange rate,if it is lower then the first currency is undervalued compared with the second and conversely it is higher, then the first currency is overvalued.[2]
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