Does the exchange rate of your data appear to support the theory of Purchasing Power Parity?Requirements:
- 2 page descriptive analysis;
- Graph of Nominal Exchange Rate and Relative Prices over time (Figure 16-2 from text, “The Yen/Dollar Exchange Rate and Relative Japan-US Price Levels, 1980-2012,” is a good model);
To construct the graph, you will need 3 data series:the official exchange rate, your country’s CPI level, and the US CPI level.First, construct a ratio of your country’s CPI level to the US CPI level.Normalize that ratio so that it is 100 in the base year.(Divide the entire series by the value of the first year, and multiply by 100.)Also, normalize the exchange rate to be 100 in the base year.(Divide the entire series by the value of the first year, and multiply by 100.)Plot the normalized price ratio and the normalized exchange rate on the same graph.