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ProblemSet5 - Department of Economics University of...

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Department of Economics Fall 2011 University of California, Berkeley Econ 182 1 Problem Set 5 Due on Thursday, October 6, in lecture. Please, write your full name , GSI , and section number on your problem set. Problem 1 Consider a model in which all goods are traded across borders. Domestic consumers spend a share γ of their spending on HOME-produced goods (indexed by H) and a share 1 – γ on FOREIGN-produced goods (indexed by F). Similarly, FOREIGN consumers spend a share γ * of their spending on HOME-produced goods and a share 1 - γ * on FOREIGN- produced goods. The price of goods produced at HOME is denoted P H and the price of goods produced at FOREIGN is denoted by P F . Thus, using a Cobb-Douglas utility function, we can write: ܲ ൌ ܲ ܲ ி ଵିఊ ܽ݊݀ ܲ כ ൌ ܲ כఊ כ ܲ ி כଵିఊ כ Where P T and P T * are the price indices for these tradable goods at HOME and FOREIGN. In this model the real exchange rate is defined as: ܴܧܴ ؠ ܧܲ כ ܲ
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