Spring 2001	ECONOMICS 2318	J.G. Gonzalez
	Problem Set # 3

This problem set is due Tuesday, May 1, 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 Sweden in 2000 in K- Kronas - billions):

1. Statistical discrepancy (+)	90
2. Change in K official reserves by foreign Central Banks (increase)	110
3. Royalty payments to U.S. software companies	780
4. Earnings sent abroad by foreign producers located in Sweden	450
5. Sales of Japanese stocks by Swedish investors	1600
6. Purchases of Swedish assets by foreigners (private)	760
7. Payments to Spanish pop stars	125
8. Gifts made to foreign nations	660
9. Exports of goods	3,200
10. Gifts received from foreigners	140
11. Interest payments received from other countries	125
12. Repatriated earnings on Swedish-owned direct investments abroad	575
13. Sales of Swedish private assets by foreigners	830
14. Royalty payments to Swedish cellular phone companies	650
15. Imports of goods	3,400
16. Purchase of Brazilian government bonds by Swedish investors (private)	1,200

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 Swedish official reserve holdings and the official reserves transaction balance (Hint: You have to find the official reserves transactions balance first).

f) Was the Sveriges Riksbank (the Swedish Central Bank) intervention in the foreign exchange market pushing the value of the Swedish Krona up or down with respect to foreign currencies? How do you know?

2. The following schedules represent the demand and supply for French Francs in Japan (whose currency is the Yen).

Exchange Rate (Yen/French Franc)	Quantity Demanded	Quantity Supplied
24	340,000	480,000
22	380,000	450,000
20	420,000	420,000
18	460,000	390,000
16	500,000	360,000
14	540,000	330,000

a) Suppose that France and Japan are under a system of flexible exchange rates. What would the equilibrium exchange rate be? How many French Francs would be traded in this period? Illustrate your answer by using a diagram.

b) Using your diagram explain how the Yen/ French Franc 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 Japan’s interest rates.

ii. The appearance of high inflation in France (while Japan’s inflation remains at a low level)

iii. Rapid economic growth in Japan.

iv. Expected increase in the value of the French Franc.

c) Look in the currency converter web site of OANDA, Inc. (http://www.oanda.com/cgi-bin/ncc) for the exchange rate between the Yen and the French Franc for Tuesday, April 24, 2001 (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 24, 2001. 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 London you can exchange one Swiss Franc (SF) for 135 Yens (¥), while in Frankfurt you can get 2.5 Deutsche Marks (DM) for 1 SF, and in Tokyo 1 DM is being exchanged for 50 ¥.

a) If you have 1,000,000 SF 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 Tokyo the exchange rate is now 1 DM equals 60 ¥?

c) What exchange rate between the Deutsche Mark and the Yen 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 2001 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 2001 NTE dealing with the country you have chosen).

b) For the country of your choice, how much were the total 2000 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.