International economics

1. Answer questions (a) through (g) based on the tables below show-ing the nominal exchange rates of the dollar, the pound and the
yen, and inflation rates in the US, the UK and Japan. You can
round your results to the nearest percentage point. (25points)
Note: the change in an exchange rate during a given year means
the change from January 1of that year to January1of the fol-lowing year. So for instance, question (a) is asking you for the
nominal appreciation or depreciation of the dollar against the
yen between Jan.1 2010and Jan.1 2011. Pay attention to which
exchange rate is being asked about – remember, if the dollar is ap-preciating against the yen, that is the same as a depreciation of the
yen against the dollar.
Dollars per
pound
Yen per dollar
Jan. 1 2006 1.84 116
Jan. 1 2007 2.00 118
Jan. 1 2008 1.85 103
Jan. 1 2009 1.57 94
Jan. 1 2010 1.54 88
Jan. 1 2011 1.60 80
Jan. 1 2012 1.59 80
Jan. 1 2013 1.56 98
Jan. 1 2014 1.65 106
(a) What was the nominal appreciation or depreciation of the
dollar against the yen during2010?
(b) What was the total nominal appreciation or depreciation of
the dollar against the pound over the first five years in the table
(2007through 2011)?
eco 245 midterm 1–due in class, march 16 2
Inflation in…
The UK Japan USA
2006 2.3% 0.2% 3.2%
2007 2.3 0.1 2.9
2008 3.6 1.4 3.8
2009 2.2 -1.3 -0.3
2010 3.3 -0.7 1.6
2011 4.5 -0.3 3.1
2012 2.8 0.0 2.0
2013 2.6 0.4 2.5
(c) What was the real appreciation or depreciation of the pound
against the dollar during2011?
(d) What was the real appreciation or depreciation of the yen
against the dollar during the three-year period2009-2011?
(e) Suppose that in2011, the real cost of living (or price level) for
a middle-class family was about20percent higher in London
than in New York. If someone earning $48,000a year in New
York was thinking of moving to London, what salary in pounds
would they need to maintain the same standard of living?
(f) Of the three currency pairs (dollar-pound, dollar-yen and
pound-yen), which comes closest to satisfying relative pur-chasing power parity for the full period shown in the table?
(g) Imagine that at the beginning of2012, the government of In-donesia decided that they would like to see a10% real depreci-ation of their currency, the rupiah, against the dollar. Suppose
that inflation in Indonesia is10%. If the nominal exchange rate
is 8,000rupiah per dollar at the beginning of2012, what would
the nominal exchange (in rupiah per dollar) be at the end of the
year if the Indonesian government achieved its goal?
2. For each of the following items, say which line(s) of the balance
of payments would be affected, and whether the item would be a
credit or debit for the United States. Be as specific as possible. (15
points)
In some cases, the transaction described will affect more than one
line; in those cases, say whether the item would be counted as a
credit or debit for each line.
Note: Investment abroad means outward investment – investment
by people in this country, in some other country. Foreign invest-ment here means inward investment – investment by people in the
rest of the world, in this country.
eco 245 midterm 1–due in class, march 16 3
Goods exports
Services exports
Goods imports
Services imports
Trade balance
Income received
Income payment
Net transfers
Current account balance
Direct investment abroad
Portfolio investment abroad
Other investment abroad
Foreign direct investment here
Foreign portfolio investment here
Foreign other investment here
Financial balance
Change in reserves
(a) The US government sends military assistance to an allied
country, which is used to buy planes from US manufacturers.
(b) An American pharmaceutical company receives royalties for a
drug it has patented.
(c) A person who lives in Canada commutes daily to the US and
gets a paycheck an American company.
(d) A person who is originally from Honduras lives and works in
the US for several years, during which time they send part of
their pay home to their family.
(e) An American retailer earns a profit from their Swedish stores,
which they reinvest to expand their presence in Sweden.
(f) A wealthy European family take a vacation in the US, spending
money that they held in an American bank account.
(g) An American investor sells off his holdings of British stocks,
and holds the money he receives in his account in a British
bank.
(h) The Bank of China increases its holdings of US Treasury
bonds.
3. Read the following description of the fictional country of Zubrowka,
then write up a balance of payments, using the same categories as
in the previous question. Obviously, there are no correct numbers,
but there is a correct pattern of larger and smaller and positive
and negative numbers. For full credit, the numbers must be con-sistent with the story, and they must add up correctly. The units
eco 245 midterm 1–due in class, march 16 4
of the entries are percent of GDP. If the description gives you no
information about a line, you can set it at zero. Just make sure the
totals add up. (15points)
Zubrowka has a successful tourist industry, with many people
from richer countries staying in its hotels each year. But it has
few other exports, and it must import oil, and many consumer
goods it doesn’t produce itself. There are a number of citizens
of Zubrowka working abroad, and the money they send home
– along with foreign aid from wealthier countries – is equal to
about2percent of GDP, just enough to cover the country’s trade
deficit. But Zubrowka has no significant foreign assets, and pays
substantial interest on its foreign debt each year. As a result, it is
a net borrower from the rest of the world, to the tune of about3
percent of GDP.
In the past, Zubrowka was considered an attractive location for
foreign direct investment, and a number of profitable businesses
there are still owned by foreign multinationals. (Zubrowka’s busi-nesses have never had a presence in the rest of the world.) But
today doubts about the political situation are leading multina-tionals to reduce their presence in Zubrowka, disinvesting in their
businesses there or selling them off entirely. Meanwhile, wealthy
residents of Zubrowka are moving their money to bank accounts
abroad. The central bank has raised interest rates and this is caus-ing foreign investors to buy Zubrowka’s bonds, but it’s not enough
to offset the outflow of foreign exchange. So far, the central bank
of Zubrowka has been able to use its foreign exchange reserves
to maintain the value of its currency, but it is not clear how much
longer it will be able to do so.
4. What is likely to happen to the Zubrowka’s exchange rate when
the central bank runs out of foreign exchange reserves? Explain
your answer in a sentence or two. (5points)
Essay questions
For each of the following, I expect answers around250words –
that is, one page, or a couple of paragraphs. For full credit, your
answers must be supported with specific examples fromLife and
Debt.(You may find it helpful to rewatch the movie if you did
not take notes on it during class.) You should also draw on your
classnotes, the textbook and the other readings.
5. Since1989, Jamaica has had a floating exchange rate. What are
the supposed benefits of a floating exchange rate for a country
like Jamaica, what problems is it supposed to help solve? Why
might changes in Jamaica’s exchange rate have failed to deliver
eco 245 midterm 1–due in class, march 16 5
those benefits, and what other problems could those changes have
caused? (20points)
6. In the movie, the narrator suggests that while Jamaica has gained
official independence, in some real ways the country is no more
free than it was as a colony. How does participation in interna-tional trade and the international financial system limit Jamaica’s
freedom? In what concrete ways have the choices of Jamaica’s gov-ernment been limited by its place in the international economy?
(20points)

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