Problem Set 5

1.	THE FUNDAMENTAL OPEN-ECONOMY RELATIONSHIP:
	a.	State the fundamental open-economy relationship.
	b.	Write out the full expression for a country's net savings (NS, which is also its net foreign investment (NFI)), and use it to show the four ways a country can increase the amount it has available for net foreign investment.

2.	ACCOUNTING FOR INTERNATIONAL TRANSACTIONS: Consider the worksheet, "Examples of International Transactions."
	a.	Report the current account balance (CAB) for each of the three countries.
	b.	Which countries, if any, increased their wealth claims with respect to the rest of the world during the reported year? How can you tell?
	c.	Which countries, if any, experienced capital outflows for the year? How can you tell?
	d.	What does the difference in the sign mean on the net unilateral transfers for the U.S. and Mexico?

3.	EXCHANGE RATE CHANGES: Consider the following exchange rate information:
		Foreign currency per dollar German marks Japanese yen March, 2000 2.0132 105.53 March, 2001 2.1747 122.38
	a.	Over the period indicated, did the U.S. dollar appreciate or depreciate against the German mark? Against the Japanese yen? How did you decide?
	b.	Did the German mark appreciate or depreciate against the Japanese yen over the same period? How did you decide?

4.	EXCHANGE RATES AND INTERNATIONAL COMPETITIVENESS: Suppose the US and Germany (G) produce, consume and trade cars and personal computers (PCs). US and German cars are imperfect substitutes for each other, as are US and German PCs. On balance, the US is a net exporter of PCs and a net importer of cars.
	a.	Assuming that the present exchange rate is 2 marks (DM) per dollar, complete the following table:
		Price of US goods... Price of German goods...   in dollars in marks in marks in dollars Cars $10,000   20,000 DM   PCs 2,000   4,000 DM
	b.	Now suppose that the value of the dollar rises to 2.5 marks, with no other changes. Re-compute prices to complete the following table:
		Price of US goods... Price of German goods...   in dollars in marks in marks in dollars Cars $10,000   20,000 DM   PCs 2,000   4,000 DM
	c.	What has happened to the international competitiveness of US auto producers? US PC producers?

5.	PURCHASING POWER PARITY: In 1999, the U.S. consumer price index (CPI) rose by 2.2%, while the Japanese CPI rose by 0.8%.
	a.	According to the theory of relative purchasing power parity, should the dollar have appreciated or depreciated against the yen in 1999? By approximately what percentage?
	b.	In fact, the U.S. dollar depreciated in terms of the yen by 13.2% in 1999. Did the dollar experience real appreciation or depreciation against the yen in 1999? By approximately what percentage?

6.	Complete the Comparing domestic and foreign returns worksheet.