Ch13 - Chapter 13 Open Economy Macroeconomics The purpose...

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Chapter 13 Open Economy Macroeconomics The purpose of Chapter 18 is to develop the basic concepts macroeconomists use to study open economies. It addresses why a nation’s net exports must equal its net capital outflow. It also addresses the concepts of the real and nominal exchange rate and develops a theory of exchange rate determination known as purchasing-power parity. By the end of this chapter, students should understand: how net exports measure the international flow of goods and services. how net capital outflow measures the international flow of capital. why net exports must always equal net foreign investment. how saving, domestic investment, and net capital outflow are related. the meaning of the nominal exchange rate and the real exchange rate. purchasing-power parity as a theory of how exchange rates are determined. Practice Questions, page103 1. What is the impact of the following actions on imports, exports and net exports? Quantify your answer. a. A convention of Spanish chiropractors meeting in Paris, drink 500 bottles of Napa wine with a value of $15,000 . U.S. exports rise, imports are unchanged, and net exports increase by $15,000 b. Your sister visits Germany and spends $2000 there on hotels and food. Your sister spends money buying foreign goods and services, so U.S. exports are unchanged, imports increase, and net exports decrease by $2,000 c. Your brother, who lives in Nebraska, buys a Volkswagen Passat for $20,000. When your brother buys a new Volkswagen Passat, an American is buying a foreign good, so U.S. exports are unchanged, imports rise, and net exports decline by $20,000 d. Benito, a foreign student from Spain, pays $4,000 tuition to attend DVC. Benito purchases U.S. services, so U.S. exports increase, imports are unchanged, and net exports increase by $4,000 e. Your professor provides economic advice to the Government of Honduras for a fee of $30,000. A foreign country buys services from the US so U.S. exports increase, imports are unchanged, and net exports increase. 1
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2. Calculate the RER of bananas between the US and the Philippines if a. Nominal ER is US$1=50Pesos b. Banana cost in US = $0.20 c. Banana Cost in Philippines = 2Pesos real exchange rate = (50 pesos per US dollar)($0.20 per American banana) 2 pesos per Philippine banana real exchange rate = 10 pesos 5 pesos real exchange rate = 5 Philippine bananas per American banana 3. Assume that cotton cost $.50 a pound in the US and 10Kroner in Sweden. If the nominal rate is 1US$=8Kroner. Is there an opportunity to arbitrage and make a profit? If so, where would you buy and where would you sell? Assuming others were doing the same thing, what would likely happen to cotton prices in the US and Sweden as a result of arbitrage. If the nominal exchange rate doesn’t change, when would this profit opportunity cease? To make a profit, you'd want to buy cotton where it's cheap and sell it where it's expensive.
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This note was uploaded on 05/10/2010 for the course ECON 220 taught by Professor Ramoo during the Spring '10 term at Diablo Valley College.

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Ch13 - Chapter 13 Open Economy Macroeconomics The purpose...

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