Problem
I. Consider the accounting identity we derived in class: S+(T -G) = I +CA
i. What does this equation say about the relationship between private and public savings?
ii. What about domestic and foreign investment?
iii. What about the government budget and the current account?
II. Find the latest Consumer Price Index (CPI) numbers for the US and the UK and compute the nominal exchange rate implied by Absolute PPP. What is the actual spot price today? Comment on the similarities/differences. (Hint: find the latest CPI for the US and UK using Yahoo/Ycharts, Google, or other online source).
III. Derive the Relative PPP condition from the Absolute PPP condition. Recall that Absolute PPP says SH/F = PHPF in a given period. (use the answer from the previous question to derive the Relative PPP condition.)