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Communicating with Wider Audiences

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1 Communicating with wider audiences 1. Read the article “The Big Mac: A Global-to-Local Look at Pricing”. IProvide a onepage summary report. Make sure to discuss the evidence presented in the article, especially that on price dispersion across countries, US states, TX and within the Dallas MSA, and the reasons PPP tends to not hold. 2. Read the article “Mexico’s Financial Vulnerability: Then and Now” by Erwan Quintin and Joaquin Lopez. Provide a one-page summary report. What led to Mexico’s financial crisis in the early 1980s? What combination of events and financial standing in the banking sector ignited the Tequila crisis in the mid 1990s? What did Mexico do to become less vulnerable to financial crisis after the Tequila crisis? Why did the authors claim that Mexico was not likely to face a crisis during the 2006 presidential election? 3. ECON grad students only. Read the article “The Purchasing Power Parity Debate”. Provide a 2-3 page summary describing the main points of the article. Make sure to discuss the evidence, as well as the econometric, and more conceptual issues that lead to the failure of the theory. 2 Testing PPP with data Download monthly data from 1990 to date on the Mexican peso/USD nominal exchange rate. Also, download the monthly CPI for both Mexico and the US. Although I do not do it on the video, it is preferred that either all of them are seasonally adjusted, or none of them are. 1. Create a time series for CPI inflation differentials between Mexico and the US for the entire sample period. 2. In Excel (or your software of choice) estimate the following equation ∆st = α0 + α1(π MX t − π US t ) + ut 1 Notice that the term (π MX t − π US t ) is the inflation differential I asked you to compute in part 1. What are the estimated values of α0 and α1? How do the estimates of α0 and α1 compare to what our simple theory of exchange rates predicts? 3. ECON grad students only. Report standard errors and t-statistics for your estimates. Are they statistically significant? What are the hypothesis tests that have to be conducted on α0 and α1 to test the simple PPP theory?

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Communicating with Wider Audiences
This discussion will evaluate and summarize two articles titled “The Big Mac: A Global-to-Local Look at Pricing” (Landry 1-8) and “Mexico’s Financial Vulnerability: Then and Now” (Quintin & Lopez 1-8).
SUMMARY OF ARTICLES
The Big Mac: A Global-to-Local Look at Pricing. The article discusses the pricing of readily tradable goods, for example, metals, chemicals, agricultural commodities, and oil. A rise in prices of such tradable goods will have a spill-over effect across borders. The evidence of price disparities across countries is given using the Big Mac as the basket. The local U.S. price, at $2.99, as well as the prices for 45 countries, in U.S. currency, presents a price range of between $1.70-$7.88, with Malaysia being the cheapest and Norway the most expensive. Large price disparities also occur within the U.S., like Adel, GA. recorded the lowest price at $2.24, while Philadelphia had the highest price at $3.84.
The prices range from $2.77 in the South to the Northeast’s $3.22. 12 locations surveyed in Dallas and across Texas depict a disparity in the Big Mac prices in the restaurants. 30 miles to the east in Dallas, a Big Mac was going for $2.35 at Fort Worth. The price disparities were evident across the Dallas area, with price differences of up to 60 cents (about 25%), around areas of 15 miles drive distance within Dallas. These scenarios show that PPP tends to not hold within locations of the same city, cities of the same state, states of the same region, its regions, the same country, and across countries. The PPP does not tend to hold for the following reasons: transportation costs (moving goods across borders), disparities in incomes, within and across countries, imposition of quotas, tariffs, and trade barriers.
Mexico’s Financial Vulnerability: Then and Now. Mexico’s financial crisis in the early 1980s was caused by worsened g...
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