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ch11 (6) - correlated with the local hourly wage(in dollars...

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Transportation costs U.S. imports: freight costs from 1% to 27% of unit cost. Landlocked countries: prices 55% higher (vs. coastal) Trade policy Average tariffs: 5% (advanced), 10% (developing) Summary of estimates for advanced economies Deviations in PPP are not random. Big Macs less expensive in poorer countries. Big Macs are 21% cheaper in Mexico and 53% less in Malaysia (vs. U.S.) Similar pattern with Starbucks tall lattes. Lattes cost 15% less in Mexico and 25% less in Malaysia, compared with the U.S. price. Explained by existence of nontraded goods. Big Mac is produced using a combination of traded goods (flour, beef and special sauce) and nontraded goods (cooks, cleaners, etc.). Dollar price of the Big Mac is strongly
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Unformatted text preview: correlated with the local hourly wage (in dollars). – What about general prices? – Most goods have nontraded and traded components, so the economy-wide price level should follow the same patterns observed above. – Strong positive relationship between U.S. price level and GDP per person. – Deviations in PPP vary systematically. – Figure 22.2 (b): Price Levels in Rich and Poor Countries Panel (b) shows that richer countries (measured by higher GDP per person) tend to have higher overall price levels (measured in a common currency). – Source: Michael R. Pakko and Patricia S. Pollard, 2003, “Burgernomics: A Big Mac™ Guide to Purchasing Power Parity,” Review, Federal Reserve Bank of St. Louis, November, 9–28....
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