Purchasing Power Parity
First of all you are not required to produce any empirical evidence. I am not asking you to conduct any sort of research; this is not the focus of the essay. Instead the focus is on what the theory says and what research studies (conducted by others) have found. In other words, you can prepare a perfectly fine essay by using the evidence found in the literature. What you are required to do, however, is to find that empirical evidence. That’s why you need to find relevant research articles to read (I think that last week Alpa demonstrated to you how to search the library online sources). Therefore, you have to conduct a small literature review and assess whether the evidence is conclusive or inconclusive with respect to the validity of the PPP and LoP. So try to summarise the evidence to support different arguments.
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> Regarding the papers that you are going to read, please notice that you don't have to focus a lot on the statistical tests used or the methodology employed by the researchers. Instead focus on the main messages of the paper; aims and what the researcher(s) found and whether this is in support or against the PPP. It would be good, however, to briefly mention the data and methods of the study (don’t expand or be very detailed).
> For example, you could write something like 'Smith and Davies (1999) examined the PPP in a group of countries comprising UK, US, Japan,..., using daily data of exchange rates from 1975 to 1995. They found strong evidence in support of the PPP in most of these countries. However, the evidence was much weaker when they examined a group of developing countries. A possible explanation could be .....'.
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> Now to go back to the question about your empirical evidence. In the lectures we talked about the Big Mac index published by The Economist. The same example also appears in the recommended course textbooks. An idea would be to try to conduct a similar exercise (small scale) based on the prices of Big Mac. For...
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