Write an extended essay on the theory of Purchasing Power Parity (PPP). Clearly explain the concept of the ‘law of one price”. Provide a concise summary of various empirical (econometric) tests of PPP relationship and your own evaluation of if the relationship holds. (50%)
Collect quarterly data of at lease eighty (80) observations (1980-2012) on nominal exchange rate (s), domestic price index (pt), and foreign price index (p*t) for China and the US(RMB is the domestic currency). Then specify a PPP relationship and test for the relationship. You need to clearly explain the domestic and the foreign countries, the specification, and the expected signs of the estimated parameters. You must use the econometric methods of unit root and co-integration tests. After estimating the PPP relationship clearly discuss your results comparing and contrasting with those in the literature. (50%)
Need to use a software named “Eviews” to do the statistic test and need to write down the chart in the main body of the essay. The chart doesn’t count any words.