Econ 344
Assume: If we trade 40% with country 1 and 60% for country 2 There is a real depreciation of 10% against country 1 There is a real appreciation of 30% against country 2 What is the change in real effective exchange rate?
(Trade1 x Change 1) + (Trade2 x Change 2) (40% x -10%) + (60% x 30%) (.40 x -.10) + (.60 x .30) -0.04 +0.18 = +14% There has been an effective trade-weighted real depreciation of 14%
What does it mean when MPCF is 0.1
For every additional $1 of income $0.10 is spent on imports
What happen's to home country's trade balance as home income increases?
Increase in imports TB falls
What is MPC made up of
MPCF(foreign)+MPCH(home)
What does MPCF stand for
Marginal propensity to consume foriegn imports
What happens to the trade balance when output increases?
TB rises imports increase
What happens to a country's trade balance as real exchange rate rises?
Trade balance is an increasing function of the home country's real exchange rate, Export more and import less TB rises
What does output equal
income
What happen's to home country's trade balance as foreign income increases
increase in home exports home TB rises