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