The Big Mac Standard: A Statistical Illustration

Abstract

We demonstrate a statistical procedure for selecting the most suitable empirical model to test an economic theory, using the example of the test for purchasing power parity based on the Big Mac Index. Our results show that supporting evidence for purchasing power parity, conditional on the Balassa-Samuelson effect, depends crucially on the selection of models, sample periods and economies used for estimations.Big Mac Index, Purchasing Power Parity, Panel Data