1. Pick any two cities in any two countries in the world that use different currencies (e.g. at most one can be from the European Union). Identify five non-traded goods and five traded goods in each place. Your job is to find out the prices of those goods for both places. It is important to try and pick the most comparable goods in terms of quality and characteristics for the nontraded goods. For example, a one bedroom apartment with one bathroom, no elevator in the building, in the same working class part of town, etc. These exact characteristics don't matter but what does is that the goods' characteristics are as similar as possible across the two places. Thinking carefully about this will give you a sense for the practical difficulties of constructing PPP price indices.

When you enter the prices into the table, it's very important you keep prices in the local currencies.

1. Construct a table similar to the following:
   
2. What is the average price ratio of Place 1 to Place 2 for non-traded goods? What about traded goods?
3. Now do an internet search to identify the market exchange rate for the currencies of the two countries' you selected. How does this market exchange rate compare to the average price ratio for both traded and non-traded goods? What might explain any differences you observe?
4. Go to the World Bank data page here. The figures in the table give you Purchasing Power Parity exchange rates for various countries' currencies to dollars. Using the most recently available 2007-2011 numbers, specify the PPP exchange rate for the two countries you selected. Depending on which countries you select, a tiny calculation might be necessary. How does this PPP exchange rate compare to the average price ratio of traded and nontraded goods? What might explain any differences you observe?
5. Using the results from this analysis, explain which is the better exchange rate to use for measuring poverty and inequality in the world? Why? Identify three weaknesses associated with using that exchange rate for poverty measurement.

2. This question asks you to synthesize some key points from our discussion on poverty and well-being. Answers to each part should be something like a short paragraphs in length.

1. Explain as clearly as possible the relationship between economic growth, changes in the income distribution, and changes in poverty. (Hint: be precise about the kind of poverty measure you are using).
2. Critically evaluate the statement: "If everybody had their basic needs met and had substantial opportunities to improve their lives, then it wouldn't matter if income or wealth inequality was extremely high."

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