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Big Mac Parity, Income, and Trade

  • Sidney Caetano
  • Guilherme Moura
  • Sergio Da Silva

Nontraded inputs account for the lion's share of a Big Mac price (Ong 1997, Parsley and Wei 2003). Major departures from Big Mac PPP may then be explained by the Balassa-Samuelson income differences effect, as shown e.g. by Click (1996). But it has been argued that Click''s result is not robust to changing estimation methods, sample of countries, and time period (Fujiki and Kitamura 2003). Here we address a key theoretical distinction between high and low income countries for the Balassa-Samuelson effect to be properly evaluated. Since this distinction is missing in Click''s analysis, we revisit his finding and take a sample which is distinct (in terms of both set of countries and time period) to meet Fujiki-Kitamura''s criticism. We find that distinguishing high from low income makes no harm to Click''s result. But we also find that openness to trade (viewed as a proxy for trade barriers) helps to explain departures from Big Mac PPP.

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Paper provided by EconWPA in its series International Finance with number 0407011.

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Date of creation: 20 Jul 2004
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Handle: RePEc:wpa:wuwpif:0407011
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  1. 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.
  2. Click, Reid W., 1996. "Contrarian MacParity," Economics Letters, Elsevier, vol. 53(2), pages 209-212, November.
  3. De Vries, C.G. & Leuven, K.U., 1994. "Stylized Facts of Nominal Exchange Rate Returns," Papers 94-002, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  4. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Fujiki, Hiroshi & Kitamura, Yukinobu, 2003. "The Big Mac Standard: A Statistical Illustration," Discussion Paper Series a446, Institute of Economic Research, Hitotsubashi University.
  6. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers 96-02, University of Washington, Department of Economics.
  7. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
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