Lecture 22-The goods market in an open economy II.pdf

Lecture 22-The goods market in an open economy II.pdf -...

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30-Jan-18 1 MACROECONOMICS LECTURE 22 THE GOODS MARKET IN AN OPEN ECONOMY II CONTENTS OF THE LECTURE 1. From nominal to real exchange rates 2. A modification to the definition of domestic demand 3. The effects of depreciation on output and trade balance CONTENTS OF THE LECTURE 1. From nominal to real exchange rates 2. A modification to the definition of domestic demand 3. The effects of depreciation on output and trade balance
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30-Jan-18 2 1. FROM NOMINAL TO REAL EXCHANGE RATES 4 Suppose that the UK produced only one good, a Jaguar luxury sedan, and the US also produced only one good, a Cadillac luxury sedan. Suppose also that the price of a Cadillac in the US is $40,000, the price of a Jaguar in the UK is £30,000 and the price of pound in terms of dollars is 1.2. What is the price of Jaguars in terms Cadillacs? In other words, how many Cadillacs can you buy if you have a Jaguar? 1. FROM NOMINAL TO REAL EXCHANGE RATES 5 Step 1 : We take the price of a Jaguar in pounds and we convert it to a price in dollars: £30,000*1.2=$36,000.
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