Problem
Last time during the mid-term exams, we took you to the beautiful island of New Caledonia located between Australia and Fiji. This time, we will tell you about the Spanish Isla de Margarita, 19 km north of the Peninsula de Araya in northeastern Venezuela. lsla de Margarita was discovered by Columbus in 1948 and quickly became known for its pearls. The island is best known for its distinctive style of music known as reggae. It has its roots in traditional mento music, ska, and rock steady. With its characteristic one drop rhythm and largely conscious and spiritual lyrics, reggae has widespread appeal among listeners all over the world and has had a major influence on hip-hop music, as well as rock and soul.
Citizens of Margarita produce pearls and provide entertainment services (Reggae music). In 2014 they produced $38 million worth of pearls, with $26 million consumed domestically and the other $12 million sold to the neighboring countries. They provided $12 million worth of Reggae playing services, $7 million in Margarita and $5 million in neighboring countries. They purchased $8 million worth of soy from neighboring countries.
i. Calculate the magnitude of GNP, GDP, net factor payments from abroad, net exports and the current account balance.
Following diplomatic parleys between New Caledonia and Margarita, the two countries decided to explore trading possibilities. New Caledonia makes ordinary pear1s that are sold for 5 guilders each.
Margarita makes deluxe pearls that are sold for 100 florins each. The real exchange rate between New Caledonia and Margarita are two ordinary pearls per deluxe pearl.
ii. What is the nominal exchange rate between the two countries?
iii. During the following year, New Caledonia has 10% domestic inflation and Margarita has 20% domestic inflation. Two ordinary pearls are still traded for a deluxe pearl. At the end of the year, what has happened to the nominal exchange rate? Which country has had a nominal appreciation? Which has had a nominal depreciation?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.