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Borders and Big Macs

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  • Anthony Landry

Abstract

I measure the extent of international market segmentation using local, national, and international Big Mac prices. I show that the bulk of time-series price volatility observed across the United States arises between neighboring locations. Using these data, I provide new estimates of border frictions for 14 countries. I find that borders generally introduce only small price wedges, far smaller than those observed across neighboring locations. When expressing these wedges in terms of distance equivalents, I find that border widths are small in relation to price variations observed across the United States. This suggests that international markets are well integrated.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 95.

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Date of creation: 2011
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Handle: RePEc:fip:feddgw:95

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Keywords: International trade;

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  1. Engel, Charles & Rogers, John H., 2001. "Deviations from purchasing power parity: causes and welfare costs," Journal of International Economics, Elsevier, vol. 55(1), pages 29-57, October.
  2. Yuriy Gorodnichenko & Linda L. Tesar, 2009. "Border Effect or Country Effect? Seattle May Not Be So Far from Vancouver After All," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 219-41, January.
  3. Charles Engel & John H. Rogers, 1995. "How wide is the border?," Research Working Paper 95-09, Federal Reserve Bank of Kansas City.
  4. DavidC. Parsley & Shang-Jin Wei, 2007. "A Prism into the PPP Puzzles: The Micro-Foundations of Big Mac Real Exchange Rates," Economic Journal, Royal Economic Society, vol. 117(523), pages 1336-1356, October.
  5. Michael R. Pakko & Patricia S. Pollard, 1996. "For here or to go? Purchasing power parity and the Big Mac," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-22.
  6. Kehoe, Patrick, 2005. "Comment on: "Determinants of business cycle comovement: a robust analysis"," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 159-162, January.
  7. Baxter, Marianne & Kouparitsas, Michael A., 2005. "Determinants of business cycle comovement: a robust analysis," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 113-157, January.
  8. David C. Parsley & Shang-Jin Wei, 2000. "Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography," NBER Working Papers 7836, National Bureau of Economic Research, Inc.
  9. Ong, Li Lian, 1997. "Burgernomics: the economics of the Big Mac standard," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 865-878, December.
  10. Robert E. Cumby, 1996. "Forecasting Exchange Rates and Relative Prices with the Hamburger Standard: Is What You Want What You Get With McParity?," NBER Working Papers 5675, National Bureau of Economic Research, Inc.
  11. Michael R. Pakko & Patricia S. Pollard, 2003. "Burgernomics: a big MacT guide to purchasing power parity," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 9-28.
  12. Anthony Landry, 2011. "Borders and Big Macs," Globalization and Monetary Policy Institute Working Paper 95, Federal Reserve Bank of Dallas.
  13. Anthony Landry, 2008. "The Big Mac: a global-to-local look at pricing," Economic Letter, Federal Reserve Bank of Dallas, vol. 3(sep).
  14. Gita Gopinath & Pierre-Olivier Gourinchas & Chang-Tai Hsieh & Nicholas Li, 2011. "International Prices, Costs, and Markup Differences," American Economic Review, American Economic Association, vol. 101(6), pages 2450-86, October.
  15. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The surprisingly low border effect of the BigMac
    by Economic Logician in Economic Logic on 2011-12-21 15:54:00
  2. Burgernomics
    by Dave Giles in Econometrics Beat: Dave Giles' Blog on 2013-05-06 21:32:00
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Cited by:
  1. Anthony Landry, 2011. "Borders and Big Macs," Globalization and Monetary Policy Institute Working Paper 95, Federal Reserve Bank of Dallas.

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