ECON 488 Purchasing Power Parity Discussion Question
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Let’s discuss prices and exchange rates this week. Firstly, what is the law of one price? When does the law of one price hold and when does it appear not to be true? For something that’s called a “law”, why is the empirical support for purchasing power parity (PPP) and the law of one price so weak in recent data? Also, explain why price levels are lower in poorer countries. And how do exchange rates fit into all of this?
Lastly, here’s a fun question. The Economist developed a “Big Mac index” to estimate PPP by looking at the price of a Big Mac across the globe. [1] If you were going to develop your own measure of PPP, what good or product would you use? Explain why you chose it. I recommend a good/product that has consistent quality and is broadly available in many countries. For example, if I were going to develop my own PPP index, I would use the price of Netflix. [2]
[1] Big Mac Index. (2018, May 23). Retrieved from https://en.wikipedia.org/wiki/Big_Mac_Index
[2] Rodriguez, A. (2017, June 03). This is the cheapest place in the world to get Netflix. Retrieved from https://qz.com/996248/this-is-the-cheapest-place-in-the-world-to-get-netflix/
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