Lec_26_real_exchange

Lec_26_real_exchange - Important events March 16-18 Monday...

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1 Important events March 16-18 Monday, March 16: 11:00 a.m. - 1:00 p.m.-- Office hours for TA Cynthia Wu in Sequoyah 234 7:30 p.m.-- TA Aaron Schroeder on Jeopardy Tournament of Champions on NBC TV Tuesday, March 17: 9:00 a.m. - 11:00 a.m.-- Office hours for TA Jaime Thomas in Sequoyah 238 1:30 - 3:20 p.m.-- Office hours for Professor Hamilton in Sequoyah 231 Wednesday, March 18: 8:00 - 11:00 a.m.-- Final exam 25% chapters 7 and 9-12 75% chapters 13-15 and 27 Chapter 27. Exchange Rates and the Open Economy A. Nominal exchange rates B. Real exchange rates U.S. consumer price index: U.S. Bureau of Labor Statistics calculates how much it would cost in January 2009 to purchase a “basket” of items that cost \$100.00 in 1983 Swiss consumer price index: Swiss Federal Statistical Office performs similar calculations To compare price of Big Mac between U.S. and Switzerland, we said we would calculate 6.5 francs 0.86 dollars 3.54dollars Big Mac in Switzerland franc Big Mac in U.S. 1.58Big Mac in U.S. Big Mac in Switzerland × ÷ = to conclude that a Big Mac costs 58% more in Switzerland compared to the U.S. price in Switzerland exchange rate relative price price in U.S. × = price in Switzerland exchange rate relative price price in U.S. × = If relative price is less than one, it means a Big Mac costs less in Switzerland than in the U.S. If relative price is greater than one, it means a Big Mac costs more in Switzerland than in the U.S. To compare price of gasoline between U.S. and Switzerland, we would calculate 4.93 francs 1.91dollars 0.86dollars gal gas in Switzerland gal gas in U.S. franc 2.21gal gas in U.S. gal gas in Switzerland ÷ × = to conclude that gasoline costs more than twice as much in Switzerland compared to the U.S. price in Switzerland exchange rate relative price price in U.S. × =

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2 To compare the overall cost of living between U.S. and Switzerland, we would calculate cost of market basket in Switzerland (in francs) cost of market basket in U.S. (in dollars) exchange rate (in dollars per franc) × that is, we would calculate Swiss CPI exchange rate (\$/franc) real exchange rate U.S. CPI × = When the real exchange rate is greater than one, it means things are more expensive in Switzerland When the real exchange rate is less than one, it means things are more expensive in the U.S.
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