Hw2 - Economics 442 Homework 2 Due: in class on Tuesday,...

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Economics 442 Homework 2 Due: in class on Tuesday, February 5 1. PPP Download the data set for this question from ctools. In the excel worksheet, there are three time series from 1980 to 2003: CPI in Japan, CPI in US, and exchange rate in terms of JPY/USD. a. Using these data, compute real exchange rates between US and Japan for the period from 1999 to 2003, and plot those rates in the graph with the horizontal axis of time periods. b. Does it appear that relative PPP holds? c. Identify which currency is overvalued relative to PPP on the graph. 2. Evidence on services suggests that the dollar price of services is higher in industrialized countries is higher than the price in developing countries. What can explain the deviation from the Law of One Price and which of these explanations could account for this bias across countries? 3. The Balassa-Samuelson Theory There are two countries, US and China. Each country makes a traded good (toys) as well as a nontraded good (haircuts). The price of toys is given by the world market at $20 for each toy, which is constant over time. In Year 1980, each American worker can make 1000 toys per year and each Chinese worker can make 800 toys per year. In Year 1981, each American worker can make 1000 toys per year and each Chinese worker can make
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This homework help was uploaded on 04/12/2008 for the course ECON 442 taught by Professor Chari during the Winter '08 term at University of Michigan.

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Hw2 - Economics 442 Homework 2 Due: in class on Tuesday,...

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