Answer key


Foreign Investment (FI): The Large-Country Case:

              Capital income   Labor income   Nation's GNP
DC
   Before FI      EF              ABC           ABCEF
   After  FI      BCDEF           A             ABCDEF
   Change        +BCD            -BC           +D
LDC
   Before FI      (BD)'           A'            (ABD)'
   After FI        D'            (ABC)'         (ABCD)'
   Change         -B'           +(BC)'          +C'



Examples of international transactions:
                                                     U.S.    Japan   Mexico

    Balance of merchandise trade       -132.6       -96.2   +132.4    -20.7
    Balance on goods and services (NX)  -71.8       -33.5   +122.3    -25.2
    Current account balance (CAB)      -103.9       -66.4   +117.7    -22.8

    Capital account balance (KAB)      +103.9       +66.4   -117.7    +22.8
    International transactions balance:   0.0         0.0      0.0      0.0

Purchasing power parity: The evidence:
                      Arg Bol Brz  Chi Col Ec  Mex Per  Uru Ven
Nominal dollar       |   |   |    |   |   |   |   |    |   |   |
appreciation (%)     |   |   |    |   |   |   |   |    |   |   |
 Predicted:          |103| 19|6500| 26| 49|130| 25| 249|168| 63|
 Actual:             |103| 23|6495| 19| 51|101| 10| 563|174| 46|
Real dollar          |   |   |    |   |   |   |   |    |   |   |
 appreciation (+) or |   |   |    |   |   |   |   |    |   |   |
 depreciation (-)    | 0 | +4| -5 | -7| +2|-29|-15|+314| +6|-17|



Compating rates: of return
                                Britain    France    Germany   Japan
Predicted $ appreciation (+) or 
  depreciation (-) to equalize 
  returns across countries:      ______    ______    ______    ______

Actual results:
Foreign currency per $:
 a. Es: spot exchange rate:       .6594     5.704     1.612     107.4
 b. Ef: forward exchange rate:    .6635     5.758     1.626     107.2
 c. chE: (Ef - Es):               .0041    ______    ______    ______
 d. %chE 100 * (Ef-Es)/Es:        .6218    ______    ______    ______
 e. Annual rate of %chE (4*d):    +2.49    ______    ______    ______

Overall return of foreign savers
on U.S. deposits:                 5.49%    ______    ______    ______

Overall return of U.S. savers on
foreign deposits:                 3.01%    ______    ______    ______