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Unformatted text preview: Department of Economics University of California, Berkeley Spring 2006 Economics 182 Problem Set 6 Due in class on Tuesday, May 9. To be handed at the beginning of lecture . Please write your name, GSI name and section time in your problem set. Problem 1: International diversification Return to the example in Chapter 21 of the two countries that produce random amounts of kiwi fruit and can trade claims on that fruit. Suppose now that the two countries also produce raspberries that spoil if shipped between countries, and that therefore are non-tradable. How would this affect the ratio of international asset trade to GNP for Home and Foreign? What can you say about the amount of risk in these countries as compared to the original example in the textbook? Problem 2: Measuring financial integration (a) Sometimes it is claimed that the international equality of real interest rates is an accurate barometer of international financial market integration. Give two reasons why there might exist real interest rate differentials despite deep financial integration. (b) A very common measure of financial integration is the volume of capital a country receives. Again, give two reasons why the volume of capital flows might be a mis- leading, incomplete, or otherwise unsatisfactory measure of financial integration. (c) Indeed, Feldstein and Horioka (1980) looked at the correlation between savings and investment (as shares of GDP) as an indicator for financial integration. Using cross-country data for 16 OECD economies between 1960 and 1974, they found a high positive correlation between savings and investment. Moreover, other studieshigh positive correlation between savings and investment....
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- Spring '08