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Individual-Asm3 Pham-Chung ss181258

This document contains two chapters about international finance concepts. Chapter 31 discusses calculating exchange rates using purchasing power parity based on the price of a Big Mac in different countries. Chapter 32 discusses Japan's typical large trade surplus due to high savings and low domestic investment, and how policies like an investment tax credit in the U.S. could decrease the trade surplus by increasing domestic investment and the real interest rate.

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61 views3 pages

Individual-Asm3 Pham-Chung ss181258

This document contains two chapters about international finance concepts. Chapter 31 discusses calculating exchange rates using purchasing power parity based on the price of a Big Mac in different countries. Chapter 32 discusses Japan's typical large trade surplus due to high savings and low domestic investment, and how policies like an investment tax credit in the U.S. could decrease the trade surplus by increasing domestic investment and the real interest rate.

Uploaded by

hoantkss181354
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 31

#7
P = $1.25 per can of soda (U.S.)
P* = 25 pesos per can of soda (Mexico)
e =?
e = P* / P
 e = 25 / 1.25
 e= 20 Mexican can of soda per U.S. can of soda.

P*(2) = 50 pesos per can of soda (Mexico)


=> e = 50 / 1.25
 e = 40 Mexican can of soda per U.S. can of soda.
=> So the peso-dollar exchange rate will increase by double if a monetary expansion
causes all prices in Mexico to double.

#8
Country Price of a Big Mac Predicted Actual Exchange
Exchange Rate Rate
Chile 2,640 pesos 473.12 pesos/$ 679 pesos/$
Hungary 850 forints 152.33 forints/$ 280 forints/$
Czech Republic 85 korunas 15.23 korunas/$ 22.3 korunas/$
Brazil 16.9 real 3.03 real/$ 3.72 real/$
Canada 6.77 C$ 1.21 C$/$ 1.33 C$/$
a.
P = $5.58 per Big Mac
+ Chile: e = P* / P = 2,640 / 5.58 = 473.12 pesos/$
+ Hungary: e = P* / P = 850 / 5.58 = 152.33 forints/$
+ Czech Republic: e = 85 / 5.58 = 15.23 korunas/$
+ Brazil: e = 16.9 / 5.58 = 3.03 real/$
+ Canada: e = 6.77 / 5.58 = 1.21 C$/$
b. The predicted exchange rate between the Chilean peso and the Canadian dollar is:
473.12 / 1.21 = 391,01 pesos per Canadian dollar.
The actual exchange rate is: 679 / 1.33 = 510.53 pesos per Canadian dollar.

c.
Calculating exchange rates between different currencies can be made simple with
purchasing power parity. It enables you to compare the relative buying power of different
global currencies so that you can make the same purchases in every nation.

Purchasing power parity is a widely used method by government agencies to compare the
outputs of nations with varying exchange rates. When comparing the economic
performance and living standards of two or more nations, the theory is essential.

CHAPTER 32

#1

Japan typically has a large trade surplus due to its high savings rate in comparison to its
level of domestic investment. As a result, there is a high net export and high net capital
outflow, creating a trade surplus. The real exchange rate is impacted by the other
possibilities (strong foreign demand for Japanese goods, low Japanese demand for
foreign goods, and structural barriers against imports into Japan), but the trade surplus is
unaffected.

#2

a. Domestic investment will be subsidized if Congress passes an investment tax credit.


As seen in the figure below, the desire to boost domestic investment causes businesses to
borrow more, which raises the demand for loanable funds. As a result, there is less net
capital outflow since the real interest rate rises. The real exchange rate rises when there is
a decrease in net capital outflow because there are fewer dollars available in the foreign
exchange market. Due to a decrease in net capital outflow and, consequently, net exports,
the trade balance also moves toward a deficit. The amount of national saving rises along
with the real interest rate. In conclusion, there is a decline in net capital outflow, an
increase in saving, an increase in domestic investment, an increase in the real interest
rate, and a shift toward a deficit in the trade balance.

b. A rise in the real exchange rate reduces exports.

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