The Law of One Price and Purchasing Power Parity单一价格定律和购买力平价.doc

Biting into the Big Mac ERASMUS UNIVERSITY ROTTERDAM Faculteit der Economische Wetenschappen Algemene Economie Begeleider: Dhr. Prof. J.M. Viaene Naam: Eric Stefan Szwarczynski Examennummer: 271977 Emailadres: eszwarczynski@ Table of contents 1 Introduction 2 Literature Review 3 The Law of One Price and Purchasing Power Parity Theory 3.1 The Law of One Price 3.2 Purchasing Power Parity 3.2.1 Absolute Purchasing Power Parity 3.2.2 Relative Purchasing Power Parity 3.3 Obstacles to Purchasing Power Parity 4 The Big Mac 5 Data 6 Absolute Purchasing Power Parity Analysis 7 Relative Purchasing Power Parity Analysis 8 Predicting Currency Movements 9 Euro versus US dollar 10 Discussion 11 References 12 Data Appendix 1 Introduction Few people today do not know about The Economist’s Big Mac Index? that was first published in 1986. Since then the magazine has published a yearly version of this index, providing an analysis of the current value of currencies throughout the world. It is an approach that provides interesting food for thought about the current status of the purchasing power parity theory, which plays such a central role in international economics. The emergence of other measures such as the Starbucks Latte Index by The Economist in 2004 and iPod Index by CommoSec in 2007 raises the question of how well do these indexes really perform and do they actually tell us anything. Any form of purchasing power parity (PPP) has its origins in the law of one price (LOP). The LOP argues that an identical good (or service) should sell at the same price in different countries once converted to a common currency. The basic argument is that arbitrage puts pressure on prices to converge. The LOP considers one, identical good but economists are often interested in national price levels. The PPP theory is an aggregation of the LOP and states that national price levels should be equal once they are converted to a common currency. Instead of one good, a packag