| Spring 2000 | ECONOMICS 2318 |
J.G. Gonzalez |
Problem Set # 3 |
This problem set is due Tuesday, May 2, at the beginning of the class period. Problem sets done on notebook paper or unstapled will not be accepted. Late problem sets are unacceptable also.
1. You are given the following figures for the international transactions of Italy in 1999 (in L- Italian Liras - billions):
1. Statistical discrepancy (+) |
25 |
2. Change in L official reserves by foreign Central Banks (increase) |
735 |
3. Royalty payments to French pharmaceutical companies |
4,200 |
4. Earnings sent abroad by foreign direct investment in Italy |
3,100 |
5. Sales of foreign based companies by Italian investors |
3,700 |
6. Purchases of Italian assets by foreigners (private) |
3,100 |
7. Payments to Argentinean soccer players |
300 |
8. Gifts made to foreign nations |
1,500 |
9. Exports of goods |
9,500 |
10. Gifts received from foreigners |
760 |
11. Interest payments received from other countries |
750 |
12. Repatriated earnings on Italian direct investments abroad |
2,100 |
13. Sales of Italian private assets by foreigners |
2,400 |
14. Royalty payments to Italian designers |
5,600 |
15. Imports of goods |
12,300 |
16. Purchase of U.S. Government bonds by Italian investors (private) |
2,100 |
Calculate the:
a) Balance on merchandise trade.
b) Balance on services.
c) Balance on income.
d) Balance on goods, services, and income.
e) Balance on current account.
f) Capital account balance.
g) Change in the Italian official reserve holdings and the official reserves transaction balance (Hint: You have to find the official reserves transactions balance first).
f) Was the Banca D’Italia (the Italian Central Bank) intervention in the foreign exchange market pushing the value of the Italian Lira up or down with respect to foreign currencies? How do you know?
2. The following schedules represent the demand and supply for Pesetas (Spain's currency) in Portugal (whose currency is the Escudo).
| Exchange Rate (Escudos/Peseta) |
Quantity Demanded |
Quantity Supplied |
| 1.50 | 165,000 | 285,000 |
| 1.40 | 200,000 | 260,000 |
| 1.30 | 235,000 | 235,000 |
| 1.20 | 270,000 | 210,000 |
| 1.10 | 305,000 | 185,000 |
| 1.00 | 340,000 | 160,000 |
a) Suppose that Spain and Portugal are under a system of flexible exchange rates. What would the equilibrium exchange rate be? How many Pesetas would be traded in this period? Illustrate your answer by using a diagram.
b) Using your diagram explain how the Escudo/Peseta exchange rate would be affected by each of the following events (in each case assume that "all other things are constant"):
i. A sharp increase in Spain's interest rates.
ii. The appearance of hyperinflation in Portugal (while Spain's inflation remains at a low level)
iii. Rapid economic growth in Portugal.
iv. Expected increase in the value of the Escudo.
c) Look in the currency converter web site of OANDA, Inc. (http://www.oanda.com/cgi-bin/ncc) for the exchange rate between the Escudo and the Peseta for Tuesday, April 25, 2000 (use the interbank rate). Describe one event that could have shifted the exchange rate from the equilibrium level you found in part a) to the one that you found for April 25, 2000. Make sure that you clearly state which curve(s) was(were) affected by that event and in which direction it(they) moved. Illustrate your answer by using a diagram.
3. Suppose that in Jakarta you can exchange one Baht (B) -Thailand's currency- for 100 Rupiahs (R) - Indonesia's currency-, while in Bangkok you can get 30 Wons (W) -S. Korea's currency- for 1 Baht, and in Seoul 1 Won is being exchanged for 3 R.
a) If you have 1,000,000 B and you want to make some money without any risk, what can you do in the international foreign exchange market? Make sure that you are specific about where you are buying and where you are selling. What is your net profit after you are done with your transactions?
b) How would your answer to part a) change if in Jakarta the exchange rate is now 1 B equals 50 R?
c) What exchange rate between the Baht and the Rupiah is the only one that could prevail in the long run after arbitrage exhausts any prospective profits (assume that the other two exchange rates are fixed)?
4. Use the information available on the Office of the U.S. Trade Representative (USTR) web page (http://www.ustr.gov/) and on the U.S. Census Bureau’s International Trade Statistics web page (http://www.census.gov/ftp/pub/foreign-trade/www/) to answer the following questions.
a) Find the 2000 National Trade Estimate Report on Report on Foreign Trade Barriers -listed within "Reports" on the USTR page. For the country of your choice, write a short summary of the key trade barriers the United States faces with this country (please print and attach to your problem set a copy of the section of the 2000 NTE dealing with the country you have chosen).
b) For the country of your choice, how much were the total 1999 U.S. exports and imports from that nation? (This data is available within "Statistics" on the Census page).
c) Which U.S. industries (use 1-digit SITC data) have the highest exports to the country you have chosen? Which industries (use 1-digit SITC data) have the highest imports from the country you have chosen? Provide a short explanation for this pattern of trade.