| Spring 1999 | ECONOMICS 2318 |
J.G. Gonzalez |
Problem Set # 3 |
This problem set is due Thursday, April 27, 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 the United Kingdom in 1998 (in £- Sterling Pounds - millions):
1. Statistical discrepancy (+) |
200 |
2. Change in £ official reserves by foreign Central Banks (decrease) |
400 |
3. Royalty payments to U.S. movie studios |
800 |
4. Earnings sent abroad by foreign direct investment in the U.K. |
5,400 |
5. Sales of foreign based companies by British investors |
5,700 |
6. Purchases of British assets by foreigners (private) |
3,700 |
7. Payments to Brazilian soccer players |
400 |
8. Gifts made to foreign nations |
2,100 |
9. Exports of goods |
13,500 |
10. Gifts received from foreigners |
900 |
11. Interest payments received from other countries |
500 |
12. Repatriated earnings on British direct investments abroad |
1,800 |
13. Sales of British private assets by foreigners |
1,500 |
14. Payments to British rock groups by foreigners |
4,000 |
15. Imports of goods |
19,000 |
16. Purchase of Japan's Government bonds by British investors (private) |
2,600 |
Calculate the:
a) Balance on merchandise trade.
b) Balance on services.
c) Balance on investment income.
d) Balance on goods, services, and income.
e) Balance on current account.
f) Capital account balance.
g) Change in the UK’s official reserve holdings and the official reserves transaction balance (Hint: You have to find the official reserves transactions balance first).
f) Was the Bank of England (the British Central Bank) intervention in the foreign exchange market pushing the value of the Sterling Pound up or down with respect to foreign currencies? How do you know?
2. The following schedules represent the demand and supply for Korunas (the Czech Republic’s currency) in Hungary (whose currency is the Forint).
| Exchange Rate (Forints/Koruna) |
Quantity Demanded |
Quantity Supplied |
3.30 |
30,000 | 60,000 |
3.10 |
40,000 | 55,000 |
2.90 |
50,000 | 50,000 |
2.70 |
60,000 | 45,000 |
2.50 |
70,000 | 40,000 |
2.30 |
80,000 | 35,000 |
a) Suppose that the Czech Republic and Hungary are under a system of flexible exchange rates. What would the equilibrium exchange rate be? How many Korunas would be traded in this period? Illustrate your answer by using a diagram.
b) Using your diagram explain how the Forint/Koruna 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 Hungary's interest rates.
ii. The appearance of hyperinflation in Czech (while Hungary's inflation remains at a low level)
iii. Rapid economic growth in Hungary.
iv. Expected increase in the value of the Forint.
c) Look in the currency converter web site of OANDA, Inc. (http://www.oanda.com/cgi-bin/ncc) for the exchange rate between the Forint and the Koruna for Tuesday, April 20, 1999 (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 20, 1999. 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 Bogota you can exchange one Peso (P) -Colombia's currency- for 5 Sucres (S) - Ecuador's currency-, while in Quito you can get 22.5 S for 1 Bolivar (B) -Venezuela's currency-, and in Caracas 1 B is being exchanged for 7.5 P.
a) If you have 3,000,000 P 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 Bogota the exchange rate is now 1 P equals 2 S?
c) What exchange rate between the Sucre and the Peso 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 1999 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 1999 NTE dealing with the country you have chosen).
b) For the country of your choice, how much were the total 1998 U.S. exports and imports from that nation? (This data is available within "Country trade data" 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.