Q1. Specify an identity for changes in netforeign wealth as a function of Gross National Product (GNP) using notationand theory presented in Chapter 12 of the Krugman and Obstfeld book.
Whyis this considered a change in net foreign wealth? Now consider identities forGNP in an open economy and savings in an open economy. What relationshipdoes savings have to the current account? Derive a relationship between privatesavings, investment, the current account, and the government de cit using theidentities for GNP and savings in an open economy, and briey comment onopposed theories of twin de cits and Ricardian equivalence.
Q.2 Let us assume there are two items ina three country international economy: real goods and loans. Let us presumethat country A exports 5 worth of goods to country B, and 10 worth of goodsto country C. Furthermore, let us presume that country A imports 10 worth ofgoods from country C, and does not import any goods from country B. Lastly,let us presume that country B exports 6 dollars worth of goods to country C,and C exports 2 worth of goods to B.Specify an internationally consistent closure (that is, one in which each coun-trys economic activity ful lls their fundamental balance of payments identity)to each countrys balance of payments given that A issues no loans to B and Bissues no loans to C.
Q.3 We are interested in the expected rate of return on an investment in sterling (£) if we start with dollars in terms ofdollars. Specify the correct and \simpli ed" formulas for this rate of returnfrom the text and course lectures, and explain the assumptions that go into the correct formula.