Part B. Short-Answer and Algebraic Questions: (The numbers in square brackets give the breakdown of the points for various parts of each question. To receive full credit, please explain your answers.)
1. This question is based on the historical data provided at 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:
2. Once the COVID-19 pandemic is under control, Argentina and Chile would both be fascinating countries to visit. You want to visit both countries and experience their wonders for yourself. But, travel advisors point out that if the two economies return to their pre-pandemic situation, it would be cheaper to go Argentina than to Chile. (See, for example, the webpage on cost comparisons.) So, visiting Argentina rather than Chile may make economic sense in that situation. A trip to Chile could be postponed till things change in some later years and the cost of travel to Chile goes down relative to the cost of visiting Argentina. You want to know why Argentina has been cheaper than Chile and what sort of changes in the two countries might change the relative costs of visiting them.
claim that Argentina is cheaper than Chile, are they comparing the nominal or the real exchange rates of the two countries? How do we know which one they are using? [6]
(b) Is the travel advisors’ claim that Argentina is less expensive than Chile corroborated by the relative price of Big Mac in Argentina and Chile in July 2019? Please use The Economist’s website for the Big Mac Index, to find by what percentage the nominal dollar price of Big Mac in Chile, PC, was higher than the nominal price of Big Mac in Argentina, PA, in July 2019; that is, calculate (PC - PA)/PA and express it as a percentage with one decimal point. Based on this calculation, is the claim corroborated? [12] Please explain your answer and show your work.
Answer:
(c) To explore the question why Argentina is less expensive than Chile, we need to know about the trends in the factors that may have affected the real exchange rates of the two economies. Below is some information about such potential factors. Discuss how this information may say about why Argentina is cheaper than Chile (in other words, connect these statements to the real exchange rate of these countries compared to each other). (Hint: at least some of your explanations will likely be connected to the model of long-run real exchange rate determination discussed in Module 6 Background Notes, Section 6.2.3)
i. In 2010, Argentina and Chile had the same per capita PPP GDP, and during 2010-2019, the average per capita GDP growth rate was 0.3% in Argentina and 2.2% in Chile. [9]
Answer:
ii. During 2010-2014, government expenditure as percent of GDP was, on average, 18% in Argentina and 20% in Chile. Then, during 2015-2019, government expenditure as percent of GDP declined to 16% in Argentina and grew to 22% in Chile. [9]
Answer:
iii. According to the 2019 Argentina’s score was 57.2 and Chile’s was 70.5, indicating much lower productivity in Argentina than in Chile, especially in the tradable sector. [9]
Answer:
iv. During 2010-2019, total natural resources rents (income derived from the extraction of natural resources) as percentage of GDP were, on average, 2.6% in Argentina and 14.3% in Chile. [9]
Answer:
3. The Biden Administration is proposing a major infrastructure plan to boost the competitiveness of the US economy against Chinese economy. published by Yahoo Finance on February 11, 2021. How does an improvement in infrastructure, which produces a nontradable local service, make the U.S. economy more competitive in international markets where tradable goods are exchanged? [10]
Answer:
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