7750 Open-Economy Macroeconomics: Basic Concepts
Problems
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 2011 the U.S. began with a trade deficit. During the year exports rose by more than imports.
What should have happened to the U.S. trade deficit?
Open-Economy Macroeconomics: Basic Concepts 7751
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?
7752 Open-Economy Macroeconomics: Basic Concepts
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?
Open-Economy Macroeconomics: Basic Concepts 7753
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?
7754 Open-Economy Macroeconomics: Basic Concepts
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?
Open-Economy Macroeconomics: Basic Concepts 7755
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.
7756 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7757
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?
7758 Open-Economy Macroeconomics: Basic Concepts
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?
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?
Open-Economy Macroeconomics: Basic Concepts 7759
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.
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.
7760 Open-Economy Macroeconomics: Basic Concepts
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?
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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?
7762 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7763
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.
7764 Open-Economy Macroeconomics: Basic Concepts
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.
Open-Economy Macroeconomics: Basic Concepts 7765
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.
7766 Open-Economy Macroeconomics: Basic Concepts
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?