Econ Ch 18

Saving and net flows of capital and goods (1) S = _______ Rearranging the previous equation and solving for Y yields Y = ________. Plugging this into the original equation showing the various components of GDP results in the following relationship: (2) S = _______ This is equivalent to S = ________, since net exports must equal net capital outflow (NCONCO, also known as net foreign investment).

1 S = Y - G - C Y = S+G+C 2 S = I +NX S = I + NCO

Computing real exchange rates Consider a basket of consumer goods that costs $72 in the United States. The same basket of goods costs MXN 224 in Mexico. Holding constant the cost of the basket in each country, compute the real exchange rates that would result from the two nominal exchange rates in the following table. Cost of Basket in U.S. ($); Cost of Basket in Mexico (Pesos); Nominal Exchange Rate(NER) (Pesos/$); Real Exchange Rate(RER) (Baskets of Mexican goods/basket of U.S. goods): 72; 224; 14.00; _______ 72; 224; 28.00; _______

4.50 9.00 RER = NER * (Cost of basket in U.S / Cost of basket in Mexico)

Net capital outflow and net exports Because of the identity equation that relates to net exports, the _______ in U.S. net exports is matched by _______ in U.S. net capital outflow. Which of the following is an example of how the United States might be affected in this scenario? Check all that apply.

Decrease A decrease The Indian tea producer purchases $1,500,000 worth of stock spread out over a few U.S. companies. The United States sells $1,500,000 worth of bonds to the Indian tea producer. The Indian tea producer hangs on to the $1,500,000 so that it can use the U.S. dollars to make investments.

Accounting for trade in goods and services Suppose the following transactions occur during the current year: 1)Manuel orders 40 cases of beer from a Dutch distributor at a price of $40 per case. 2)A U.S. company sells 200 transistors to a Spanish company at $15.00 per transistor. 3)Shen, a U.S. citizen, pays $1,100 for a computer he orders from Dellosoft (a U.S. company). Complete the following table by indicating how the combined effects of these transactions will be reflected in the U.S. national accounts for the current year. Hint: Be sure to enter a "0" if none of the transactions listed are included in a given category and to enter a minus sign when the balance is negative.

Name: Amount ($) Consumptions: 2,700 Investmetn: 0 Government Purchase: 0 Imports: 1600 Exports: 3000 Net Exports: 1,400 Gross Domestic Product (GDP): 4,100

Pricing foreign goods The nominal exchange rate is the price of one currency in terms of another currency. A nominal exchange rate specifies how many units of one country's currency are needed to buy one unit of another country's currency. Suppose the following table presents nominal exchange rate data for June 13, 2019, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow. Foregin Currency; Cost of One Unit of Foreign Currency ($) Brazilian real (BRL); 0.4067 Canadian dollar (CAD); 0.7950 Euro (EUR); 1.2035 Japanese yen (JPY); 0.009126 Mexican peso (MXN); 0.0920 United Kingdom pound (GBP); 1.8011 Suppose that on June 13, 2019, an ornamental bookcase handmade in the United Kingdom is priced at GBP 570. The approximate U.S. dollar price of the bookcase would be ______. If the nominal exchange rate for the U.S. dollar-Japanese yen rises from $0.009126 to $0.0109512 per Japanese yen, the Japanese yen _______ in value, or ______ , relative to the U.S. dollar.

$1,026 Increases Appreciates

Purchasing-power parity Purchasing-power parity (PPP) theory states that exchange rates would need to equalize the prices of goods in any two countries. For the dollar price of a Big Mac to be the same in both countries, a U.S. citizen would need to be able to convert $5.74 into exactly GBP 3.29. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom: PPP Exchange Rate (U.S. Dollars per British pound)PPP Exchange Rate (U.S. Dollars per British pound) = = $5.74GBP 3.29$5.74GBP 3.29 = = $1.74 per pound$1.74 per pound The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Euro area (that is, the PPP exchange rate for Big Macs) is _______. This change would mean that the euro had _______ against the dollar. If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage opportunity? Check all that apply.

$1.41 per euro Appreciated Exporting Big Macs from the Euro area to the United States

Purchasing-power parity Using data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in the United States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: Dollar price of a Big Mac in the United KingdomDollar price of a Big Mac in the United Kingdom = = GBP 3.29×$1.25GBP 1.00GBP 3.29×$1.25GBP 1.00 = = $4.11$4.11 For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries! Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given. Note: Round your answers to the nearest cent. Big Mac Index: January 2019 Place; Local Price (their currency); Actual Exchange Rate ($/unit of their currency); Dollar Price ($) Euro area; 4.08; 1.12; _______ Norway; 42.00; 0.12; _______ United Kingdom; 3.29; 1.25; 4.11 Poland; 10.80; 0.26; 2.81 China; 21.00; 0.14; 2.94

4.57 5.04

Factors that influence international trade World trade has grown substantially in the last 60 years. For example, while world output grew at an annual rate of 3.8% per year between 1950 and 2003, world exports grew at 10.8% per year over the same time period. Which of the following help to explain the increase in international trade and finance since the 1950s? Check all that apply.

Better high-speed rail lines. The widespread use of the Internet to conduct business. International trade agreements such as the North American Free Trade Agreement (NAFTA).

Imports, exports, and the trade balance Between 1984 and 1985, the ______ _______ in dollar terms and ______ as a percentage of GDP.

Deficit Grew Grew

Imports, exports, and the trade balance The following table shows the approximate value of exports and imports for the United States from 1983 through 1987. Complete the table by calculating the surplus or deficit both in absolute (dollar) terms and as a percentage of GDP. If necessary, round your answers to the nearest hundredth. (Find for the exports - imports (billions of $) & (% of GDP)) Table: Year; GDP (billions of $); Exports (billions of $); Imports ( billions of $) 1983; 3,535.0; 277.0; 328.6; ________; _________ 1984; 3,931.0; 302.4; 405.1; ________; _________ 1985; 4,218.0; 302.0; 417.2; ________; _________ 1986; 4,460.0; 320.3; 452.9; ________; _________ 1987; 4,736.0; 363.8; 508.7; ________; _________

Exports - Imports (Billions of $); (% of GDP) -51.6; -1.46 -102.7; -2.61 -115.2; -2.73 -132.6; -2.97 -144.9; -3.06

Saving and net flows of capital and goods Now suppose that a country is experiencing a trade deficit. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of a Trade Deficit Exports ____ Imports Net Exports _____ 0 C + I + G _____ Y Saving ____ Investment Net Capital Outflow ___ 0

Exports < Imports Net Exports < 0 C + I + G > Y Saving < Investment Net Capital Outflow < 0

Net capital outflow and net exports An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true: Net Capital OutflowNet Capital Outflow = = Net ExportsNet Exports In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold. Suppose you are the purchasing manager for a large chain of restaurants in the United States, and you need to make your semiannual purchase of tea. You pay $1,500,000 for a shipment of tea from an Indian tea producer. Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column. Hint: The magnitude of change should always be positive, regardless of the direction of change. (only need to fill in for Direction of Change; & Magnitude of Change ($))

Title: Direct of Change; Magnitude of Change ($) Exports: No change; 0 Imports: Increase; 1,500,000 Net Exports: Decrease; 1,500,000

Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (YY) equals total expenditure on the economy's output of goods and services. Thus, where CC = consumption, II = investment, GG = government purchases, XX = exports, MM = imports, and NXNX = net exports: Y = _____ Also, national saving is the income of the nation that is left after paying for __________. Therefore, national saving (SS) is defined as:

Y = C + I + G + NX Government purchases and consumption