Subjective Short Answer
1. Last month a country sold more goods and services to residents of foreign countries than it purchased from them. What
does this imply about this country’s trade balance?
2. Last year a country sold $500 billion euros worth of goods to foreigners and had a trade deficit of $100 billion euros.
What was the value of its imports?
3. In the first quarter of 2015 the U.S. had a trade deficit. In the first quarter of 2016 exports fell and imports rose.
According to these numbers what happened to net exports?
4. If a country’s exports were 500 billion pesos and its imports were 300 billion pesos, what would its trade balance be?
5. As measured by the amount of trade it does, has the U.S. economy become more internationalized? Provide two reasons
for this change.
6. A U.S. mutual fund buys stock issued by a corporation in Colombia. A U.S. grocery store chain builds and manages a
new warehouse in Honduras. Which one(s) of these is foreign direct investment? Which one(s) would be taken into
account when computing U.S. net capital outflows?
7. A U.S. mutual fund uses $1 million to buy yen from a Japanese bank. It then uses these yen to buy stocks in a Japanese
electronics firm. The Japanese electronic firm then exchanges the $1 million dollars of yen for dollars from a U.S. bank. It
uses these dollars to buy equipment manufactured by a company located in the U.S.
As a result of these exchanges, by how much, if at all, and in which direction does:
A. U.S. net exports change?
B. U.S. net capital outflow change?
8. A U.S. firm called EcoWind produces windmills for households to generate electricity. It uses 25,000 recently obtained
pesos to buy copper from a mining company in Argentina. As a result of this exchange, by how much, if at all, and in
which direction did:
A. U.S. net exports change?
B. U.S. net capital outflow change?
9. A U.S. grocery store chain bought $800,000 worth of Kenyan currency from a bank in Kenya. It then used these funds
to buy $800,000 worth of coffee from Kenyan coffee growers.
As a result of this exchange, by how much and in which direction did:
A. U.S. net exports change?
B. U.S. net capital outflow change?
10. The Norwegian government uses $500,000 of previously obtained U.S. dollars to buy $500,000 of police cars from a
U.S. company.
As a result of this exchange, by how much, if at all, and in which direction did:
A. U.S. net exports change?
B. U.S. net capital outflow change?
11. A department store chain in Japan uses yen to purchase 500,000 U.S. dollars from a U.S. bank. It then uses these
dollars to buy DVDs from a U.S. filmmaker. As a result of these transactions:
A. By how much and in what direction did U.S. net exports change?
B. By how much and in which direction did U.S. net capital outflow change?
12. A U.S. bank loaned a Canadian oil company 1 million U.S. dollars. The Canadian company then used the entire loan
to buy mining equipment from a U.S. company.
As a result of these transactions, by how much and in which direction did:
A. U.S. net exports change?
B. U.S. net capital outflow change?
13. A country recently had a trade deficit of 350 billion euros. Its residents also purchased 400 billion euros of foreign
assets. What was the value of this country’s assets purchased by foreigners?
14. A country recently had a trade deficit of $2.5 trillion and purchased $3 trillion of foreign assets. How many of its
assets did foreigners purchase?
15. A country had a net capital outflow of 300 billion euros and exports of 400 billion euros. What was the value of its
imports?
16. A country had a net capital outflow of $1.5 trillion and imports of $0.5 trillion. What was the value of its exports?
17. Last year residents of Country A purchased $600 billion of foreign assets. Foreigners purchased $425 billion dollars of
assets and $375 billion of goods and services from country A. What was the value of Country A’s imports?
18. Last year residents of country A purchased $400 billion of foreign assets and $200 of foreign goods. Foreigners
purchased $300 billion dollars of country A’s assets. What was the value of country A’s exports?
19. Last year a country purchased $1.5 trillion worth of goods and services from foreign countries, sold $2 trillion worth
of goods and services to foreign countries and had national saving of $1.25 trillion. What was the value of its domestic
investment? Show your work.
20. Last year country A’s residents purchased $700 billion of goods and services from and sold $500 billion of goods and
services to residents of foreign countries. Its domestic investment was $1,100. What was country A’s saving? Show your
work.
21. A country recently had $800 billion worth of domestic investment and its residents purchased $400 billion worth of
foreign assets. If foreigners purchased $100 billion of this country’s assets, what was this country’s saving? Explain how
your found your answer.
22. A country recently had GDP of $1,200 billion. Its consumption expenditures were $700 billion, its government spent
$200 billion, and it had domestic investment of $175 billion. What was the value of this country’s net capital outflow?
Show your work.
23. A country recently had a GDP of $1000 billion. Its consumption expenditures were $650 billion, its government spent
$250 billion, and it had domestic investment of $150 billion. What was the value of this country’s net capital outflow?
Explain how you found your answer.
24. A country recently had saving of 250 billion euro and domestic investment of 400 billion euro. What was the value of
this country’s net exports? Show your work.
25. If a nation produces more than it spends what do we know about:
A. its net exports?
B. its net capital outflow?
C. its saving in relation to its domestic investment?
26. If a nation produces less than it spends what do we know about:
A. its net exports?
B. its net capital outflow?
C. its saving in relation to its domestic investment?
27. Last year a country had $700 billion of saving and $900 of investment. What was its net capital outflow? How is it
possible for a country to have investment that exceeds saving?
abroad, that is if on net foreigners purchase domestic assets.
28. Last year a country had $700 billion of saving and $900 of investment. This year it had $1000 billion of saving and
$800 billion of investment. By how much did net capital outflow change? By how much did net exports change? How is it
possible for a country to have saving that is greater than investment?
foreign is a part of domestic saving.
29. A country recently had saving of 300 billion euros and domestic investment of 200 billion euros. What was the value
of this country’s net exports? Explain how you found your answer.
Since net exports = net capital outflow, net exports were also 100 billion euro
30. A farm equipment retailer in Azerbaijan exchanges Azerbaijan manats (the currency of Azerbaijan) for $300,000 a
bank in Azerbaijan was holding. It uses the $300,000 to buy farm equipment from a U.S. company. The U.S. company
deposits half of these funds in a U.S. bank and exchanges the other half for euros from a bank in London.
As a result of these transactions, by how much, if at all, and in which direction did:
A. U.S. net exports change?
B. U.S. net capital outflow change?
31. While vacationing in Italy, you see an interesting meal on a menu. The price is 24 euros.
A. If the exchange rate is .80 euros per dollar, how many dollars would you have to give up to buy the meal?
B. If the dollar appreciated against the euro, but the price of the meal remained 24 euro, would the meal cost more or
fewer dollars? Explain.
32. While vacationing in Turkey you see a rug you consider purchasing. The seller tells you the rug costs 1,200 Turkish
lire.
A. If the exchange rate is .60 lira per dollar, how many dollars does the rug cost?
B. If the dollar depreciates against the lira, will it take more or fewer dollars to buy the rug? Explain.
33. While on vacation in Europe you notice that a tablet computer is selling for 600 euros in France and for 533 pounds in
Britain. You also know that the exchange rates are .75 euros per dollar and .65 British pounds per dollar. Where is the
number of dollars you would pay for the tablet lower? How many dollars would you have to pay to buy it there?
34. While vacationing in Agra, India, the price of one night’s stay at your hotel room rises from 6600 rupees to 7200
rupees. If the exchange rate was previously 55 rupees per dollar, what would the exchange rate need to be now in order
for the number of dollars you pay for your room to remain the same? Does this imply the rupee depreciated or appreciated
against the dollar?
35. While on a study abroad program you see a McDonald’s in Paris. A combo meal costs 8 euros. The same meal costs
$6 in the U.S. and the exchange rate is .75 euros per dollar.
A. Find the real exchange rate. Show your work.
B. In terms of dollars where is the combo meal cheaper?
36. A dozen eggs cost $2 in the U.S. and 12 pesos in Argentina. If the real exchange rate is 5/6, what is the nominal
exchange rate? Show your work.
37. A certain cell phone sells for 2400 yuan in China and for $300 in the U.S. The nominal exchange rate is 6.5 yuan per
dollar.
A. Find the real exchange rate. Show your work.
B. In terms of dollars where is the cell phone cheaper?
38. In the U.S. a television costs $400. In South Africa the same television costs 3000 rand (the currency of South Africa).
The nominal exchange rate is 8 rand per dollar.
A. Find the real exchange rate. Show your work.
B. In terms of dollars where is the television cheapest?
39. In the U.S. a delivery van costs $30,000. In Uruguay the same delivery van costs 720,000 pesos. The nominal
exchange rate is 20 pesos per dollar.
A. Find the real exchange rate. Show your work.
B. In terms of dollars where is the television cheaper?
40. In the U.S. a box of tea costs $5. The same box of tea in Uganda costs 10,000 schillings (the currency of Uganda). If
the real exchange rate is 5/4, what is the nominal exchange rate? Show your work.
41. A pound of steak costs $10 in the U.S. and 56.25 riyals (the currency of Saudi Arabia) in Saudi Arabia. If the real
exchange rate is 2/3, what is the nominal exchange rate? Show your work.
42. A quality men’s suit in the U.S. costs $400. The same suit costs 300 British pounds in the U.K. The nominal exchange
rate is .60 pounds per dollar.
A. Find the real exchange rate. Show your work.
B. In terms of dollars where is the suit cheaper?
43. A bushel of apples costs $15.00 in the U.S. The same apples cost 1,600 yen in Japan. If the exchange rate is 80 yen per
dollar, is there a possibility for arbitrage? Explain and defend your answer. As part of your defense, find the real exchange
rate.
44. A pair of hiking boots costs $120 in the U.S., if the real exchange rate is 6/5 and the nominal exchange rate is 2
Brazilian reais per dollar, what is the price of the same hiking boots in Brazil?
Show your work.
45. The nominal exchange rate is 3 Malaysian ringgits per dollar. The real exchange rate is 8/5. If a Big Mac costs 7.5
ringgits in Malaysia, how much does a Big Mac cost in the U.S.? Show your work.
46. During 2011 the inflation rate in Brazil was about 6.6% while in the U.S. it was about 3.3%. At the start of 2011 the
nominal exchange rate was about 1.7 Brazilian real per U.S. dollar.
If purchasing-power parity holds, about what should the nominal exchange rate have been at the end of 2011? Show your
work.
47. The price level in Country A is 250. The price level in Country B is 300. If purchasing-power parity holds, what is the
nominal value of Country A’s currency in the market for foreign exchange with Country B? Show your work.
48. The nominal exchange rate is 90 Pakistani rupees per dollar. The price of a shirt in Pakistan is 1800 rupees. The same
shirt sells for $25 in the U.S.
A. What is the real exchange rate? Show your work.
B. Can arbitragers make a profit?
C. If your answer to C is yes, where would they buy and where would they sell?
49. The nominal exchange rate is 32 Russian rubles per dollar. The price of a bushel of wheat is 260 rubles in Russia and
$7 in the U.S.
A. What is the real exchange rate? Show your work.
B. Can arbitragers make a profit?
C. If your answer to B is yes, where would arbitragers buy and where would they sell.
50. Assuming purchasing-power parity holds and that over a period of five years the dollar had appreciated relative to the
currency of Country X, what would explain the appreciation of the dollar?
51. Over the last 5 years the amount of country A’s currency it took to buy a unit of country B’s currency more than
doubled.
A. Did country A’s currency depreciate or appreciate?
B. According to purchasing-power parity, what explains the change in the value of country B’s currency?
52. List the factors that might influence a country’s exports, imports, and trade balance.
53. Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why and in what directions
this changes U.S. net exports and U.S. net capital outflow.
54. Why are net exports and net capital outflow always equal?
55. Colonial America had little industry and so had mostly raw materials to export. At the same time, there were many
opportunities to purchase capital goods and earn a high rate of return because there was little existing capital so that the
marginal product of capital was relatively high. What does this suggest about net exports and net capital outflow in
colonial America?
56. Derive the relation between savings, domestic investment, and net capital outflow using the national income
accounting identity.
57. Suppose that a country has $120 billion of national saving, and $80 billion of domestic investment. Is this possible?
Where did the other $40 billion of national savings go?
58. How do the nominal exchange rate and the real exchange rate differ?
59. How do we find the real exchange rate from the nominal exchange rate?
60. Suppose a bottle of wine costs 20 euros in France and 25 dollars in the United States. If the exchange rate is .80 euros
per dollar, what is the real exchange rate?
61. What is the logic behind the theory of purchasing-power parity?
62. Suppose that a U.S. dollar buys more gold in Australia than it buys in Russia. What does purchasing-power parity
imply should happen?
63. What does purchasing-power parity imply about the real exchange rate? Explain what this means.
64. According to purchasing-power parity, what is the relationship between changes in price levels between two countries
and changes in nominal exchange rates?
65. Can purchasing-power parity be used to explain the fact that the U.S. dollar depreciated by more than 50 percent
against the German mark between 1970 and 1998, but appreciated by more than 100 percent against the Italian lira during
the same period? Defend your answer.
inflation. In fact, that is exactly what has happened.
66. Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does
purchasing-power parity imply will happen to the real and to the nominal exchange rate?
that a dollar buys more Turkish lira.
67. Assuming all other things equal, what would happen to the U.S. dollar real exchange rate under each of the following
circumstances?
The U.S. nominal exchange rate depreciates.
U.S. domestic prices increase.
Prices in the rest of the world rise.
a.
The U.S. dollar real exchange rate depreciates.
b.
The U.S. dollar real exchange rate appreciates.
c.
The U.S. dollar real exchange rate depreciates.
68. Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not
completely accurate?
goods are not always perfect substitutes when they are produced in different countries.
69. Suppose a lobster supper in Maine costs fewer dollars than a Lobster supper in Paris, France. Explain why this is
inconsistent with purchasing-power parity and explain why the inconsistency may exist.