PROBLEMS AND APPLICATIONS

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PROBLEMS AND APPLICATIONS

.l How would me the flowing transactions affect U.S. exports, imports, and net exports?

a, American art professor spends the summer touring museums in Europe.

b, Students in Paris flock to see the latest movie from Hollywood.

c, Your uncle buys a new Volvo.

2.Would each of the following transactions be included in net exports or net capital outflow? Be sure to indicate whether it would represent an increase or a decrease in that variable.

a. A Canadian buys 100 shares of stock in General Motors.

b. An American firm builds a factory in Mexico.

c. A Mexican buys a bottle of Chardonnay produced in California.

3. International trade in each of the following products has increased over time. Suggest some reasons this might be so.

a. wheat.

b. banking services

c. computer software

d. automobiles

4. Describe the difference between foreign direct investment and foreign portfolio investment is more likely to engage in foreign direct investment-a corporation or an individual investor? Who is more likely to engage in foreign portfolio investment?

5. How would the following transactions affect U.S. net capital outflow? Also, state Whether each involves direct investment or portfolio investment.

a. An American cellular phone company establishes an office in the Czech Republic.

h. Harrod’s of London sells stock to the General Electric pension fund.

7 The business section of most major newspapers contains a table and use it to answer the following questions .

a, Does this table show nominal or real exchange rates? Explain.

b. What are the exchange rates between the United State sand Japan? Calculate the exchange rate between Canada.

8. What is happening to the U.S. real exchange rate in each of the following situations? Example,

a The US. nominal exchange rate is unchanged, but prices rise faster in the United States than abroad.

b. The US. nominal exchange rate is unchanged, hut prices  faster a broad man in the United States.

c. The US. nominal exchange rate declines, and prices are unchanged in the United States and abroad.

d, The US. nominal exchange rate declines, and prices  faster abroad than in the United States.

9. A can of soda costs $0.75 in the United States and 12 pesos in Mexico. What would the peso dollar exchange rate be if purchasing-power parity holds? If a monetary expansion caused all prices in Mexico to double, so that soda rose to 24 pesos, what would happen to the peso-dollar exchange rate?

11. Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar.

a. Explain how you could make a profit from this situation, What ‘would be your profit per bushel of nee? If other people exploit the same opportunity, what would happen to the price of rice in Japan and the price of rice in the United States?

b. Suppose that rice is the onion commodity in the world. What would happen to the real exchange rate between the United States and Japan?

12. A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs. Here are data for a few more countries.

1

J.. for each country, compute the predicted exchange rate of the local currency per U.S. dollar. (Recall that the u.s. price of a Big Mac was $3.06.)

b. According to purchasing-power parity, what is the predicted exchange rate between the Hungarian for in the Canadian dollar? What is the actual exchange rate?

c. How well does the theory purchasing-power parity explain exchange rates?

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PROBLEMS AND APPLICATIONS