Big Mac Parity, Income, and Trade

Sergio Da Silva, Federal University of Rio Grande Do Sul
Sidney Caetano, Federal University of Rio Grande Do Sul
Guilherme Moura, Federal University of Rio Grande Do Sul

Abstract

Nontraded inputs account for the lion's share of a Big Mac price. Major departures from Big Mac PPP may then be explained by the Balassa−Samuelson income differences effect. But it has been argued that that result is not robust to changing estimation methods, sample of countries, and time period. Here we address a key theoretical distinction between high and low income countries for the Balassa−Samuelson effect to be properly evaluated. We revisit previous findings and take a sample that is distinct in terms of both set of countries and time period. We find that distinguishing high from low income makes no difference, and also that openness to trade (viewed as a proxy for trade barriers) helps to explain departures from Big Mac PPP.