The purpose of this assignment is to test the relative and absolute PPP Theorem for the country of your
choice and write a well-structured research report about the whole process of acquiring and refining
your date, applying the theory and estimation, and interpreting the results. In order to help you, your
paper should include, among other things, following steps. Please note that your final paper must have
a complete structure from introduction to conclusion and references with an internal coherence. These
steps are just to help you to organize your paper, and not to be treated like questions to get your answer
mechanically.
Part 1)- Testing the Absolute Purchasing Power Parity theorem:
1)- Choose a period of time not shorter than 25 years and as recent as possible. For each year, find
following time series data for your country from reputable sources (World Bank, IMF, or UN): CPI
and GDP deflator data for the US and your country, also the nominal exchange rate in terms of the
US$. Make sure all indexes base year is the first year of your dataset. Also normalize your exchange
rate observations such that the exchange rate for the first year of your dataset is 100.
Present the data in form of tables and graphs that you think are informative for your audience. Discuss
the sources of your data, nature of the data and the assumptions and calculations that you may use to
construct the needed data. (10 points)
2)- Calculate Absolute Purchasing Power Parity exchange rate, PPP E , for each year, using both CPI and
GDP deflator to see which one works better. Also calculate the misalignments too. Explain your
calculations. (15 points)
3)- Compare and discuss the results in part (2), theoretically and also empirically for your country.
Show your results in form of tables and graphs that you think are informative. (15 points)
Part 2)- Testing the Relative Purchasing Power Parity theorem:
4)- Using your variables in part (1), calculate the domestic and foreign inflation rates (for both GDP
deflator and CPI index) and nominal depreciation rate. Run a regression between nominal depreciation
rate as the dependent variable and the inflation differential as the independent variable. Force the
regression to set the intercept equal zero. All estimated coefficients and statistics should be fully
presented. The computer output of the estimation should be included. (25 points)
If you need a software to do the regression, you can use LINEST function in MS Excel to do the
estimation. You can use any other regression software. Please search YOUTUBE, for tutorials to use
LINEST. You can learn it within a few minutes.
5)- – Discuss the size and sign of the coefficients. Discussing the statistics of the model (t or standard
error, F, and R2). Using the result of regression, discuss how well the relative PPP theorem is working
for your country. Present the results in form of graphs that you think are informative.
(15 points)
Part 3)- General:
6)- General organization, quality of presentation, creativity and elaboration of the paper and also
proper referencing: (20 points)
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Administrative issues:
– The project should be done in groups of 3. If you cannot find partners, email me right away
before the deadline in below, I will assign individuals to groups based on the available requests, in
order of arrival. Your partners can be in any of two sections: night or afternoon sections.
One of you should let me know following information by email, by Sunday Oct. 30:
– The names and student ID Numbers for both group members.
– A list of six or seven countries from the next page list, in order of your preference. I will
choose and let you know the country of your group. You cannot change your partner and
country, after my approval. Countries will be assigned on the first come first serve basis. So,
in order to get your first choice you need to act fast.
– The quality of analysis always matters more than quantity. But your assignment could be around 12
pages (excluding the references), using letter size paper, double spaced and 12 cpi font size.
– You should report all your references. As you know plagiarism is a violation that is prosecuted
based on the university rules.
– The assignment file must be received by email address [email protected], by Nov, 27,
at 6pm, sharp. You must use your UofT EMAIL ACCOUNT to send your project file. Don’t use
Yahoo, Hotmail and … accounts to send the file. The file must include the names and student ID
Numbers of all group members.
– When you submit the final assignment file, put this on the subject line of your email:
ECO365 Country last name1 last name2 last name3
For example for Nigeria: ECO365 Nigeria Smith Jones Jefferson
-The only acceptable submission format is ONE file in PDF format. Assignments in other formats or
multiple files will not be graded. The name of the file must be:
ECO365_Country_lastname1_lastname2_lastname3.pdf
For example for Nigeria: ECO365_Nigeria_Smith_Jones_Jefferson.pdf
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– The file must be sent only once by only one of the group members. If you send several versions or
several times, one of them is selected, RANDOMELY.
If you don’t follow these rules, your file Will Not Be Graded.
– The deadline will not be extended. No excuse like network failure or system interruption … is
acceptable. If you miss the project, it cannot be substituted by anything else.
– All group members are equally responsible for everything and all parts of the project, and receive the
same mark. Any work division among the group members is just internal, and irrelevant for the
assignment responsibility and mark.
– I will not intervene in any inter or intra group problems and issues. If any of your partners drop the
course, more likely you have to finish the project by yourself.
List of Countries
A: Algeria, Argentina, Armenia, Azerbaijan
B: Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Burkina Faso
C: Cambodia, Cameroon, Chile, Colombia, Congo, Costa Rica, Côte d’Ivoire,
D: Dominican Republic
E: Ecuador, Egypt, El Salvador, Ethiopia
G: Gabon, Ghana, Guatemala,
H: Honduras
I: India, Indonesia, Iran, Israel
J: Jamaica, Jordan
K: Kenya, Korea
L: Lebanon, Lesotho, Libya
M: Madagascar, Malawi, Malaysia, Mali, Mexico, Morocco, Mozambique, Myanmar
N: Namibia, Nepal, Nicaragua, Niger, Nigeria
P: Pakistan, Panama, Paraguay, Peru, Philippines
S: Senegal, Singapore, South Africa, Sri Lanka, Sudan, Syria
T: Thailand, Tunisia, Turkey, Tanzania
U: Uganda, Uruguay
V: Venezuela, Vietnam
Z: Zambia, Zimbabwe
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