Looking at the actual prices does the ppp hold between us


1. If a pair of shoes in the United States costs $45, and a pair of the exact same shoes is sold in Mexico for 430 pesos while the exchange rate is E = $0.1100/pesos, what arbitrage opportunities exist (if any)? Ignoring transactions costs, explain how you would take advantage of this.

2. Use the below table to answer the following questions:

Country

Exchange rate per dollar

Price in local currency

South Africa (rand)

8

3,500

Brazil (real)

2.2

1,200

India (rupee)

45

18,000

Mexico (peso)

10

6,000

a. Suppose a computer costs $500 in the United States. Looking at the actual prices, does the PPP hold between U.S. and Brazil? If PPP were to hold at the nominal exchange rate provided, what would be the price of a computer in Brazil?

b. Suppose a computer costs $500 in the United States. With the price of the computer given in local currency in India, is the Indian rupee overvalued or undervalued? By how much (in percent)?

Category

Billions of dollars

Consumption

400

Investment

150

Government spending

80

Exports

210

Imports

60

Foreign income payments to domestic factors

20

Domestic income payments to foreign factors

10

Net unilateral transfers

5

3. Using the hypothetical U.S. national income and product accounts data from the above table, answer the following:

a. Calculate GNE.
b. Calculate the trade balance.
c. Calculate GDP.
d. Calculate GNI.
e. Calculate net factor income from abroad.
f. Calculate the value of current account.
g. Calculate GNDI.
h. Calculate national savings for U.S.

Country Exchange Rate Money Growth Real Income Growth

Country

Exchange Rate

Money Growth

Real Income Growth

United States

 

4%

2.5%

Mexico

0.25 $/peso

6%

5%

UK

1.5 $/GBP

2%

2%

France

1.2 $/euro

7%

4.5%

4. Use the table above. If you were to predict the $/euro exchange rate, what would the expected exchange rate be? If the Federal Reserve wants the dollar to depreciate against the euro in the long run, what monetary policy should they implement to ensure that?

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International Economics: Looking at the actual prices does the ppp hold between us
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