Reference no: EM133133809
Relative PPP
Using fred.stlouisfed.org, look up the nominal exchange rate between the U.S. and Japan.
1. What was it in January 1980? What was it in January 2015?
2. If relative PPP held, would you expect Japan or the United States to have had a bigger percentage change in their price index? By how much?
3. Next, look up the consumer price index for Japan. How much (in percent) did it change between January 1980 and January 2015?
4. What percent did U.S. CPI change?
5. How different is your answer to 2 from your answers to 3 and 4?
2 Balassa-Samuelson
Consider the model we worked on in class. Suppose c= √cNTcT.
1. What is the price index for this consumption function? You can use the formula or derive it yourself. Feel free to omit the constant.
2. Suppose for the home country, they produce tradable and non-tradable goods equally, aT= aNT= 6 (measures in goods produced per hour). What is the relative price of tradables and non-tradables?
3. The foreign country is better at producing both goods: a∗T= 27 and a∗NT= 12. What is the relative price in foreign? Do you expect the real exchange rate between these two countries to be bigger or smaller than one?
4. The wage in the home country is 12 dollars per hour. The wage in the foreign country is 18 euros per hour. What is the price of the tradable good in each country?
5. What must the nominal exchange rate be if the law of one price holds?
6. Calculate the price level in each country (again, feel free to omit the constant)
7. What is the real exchange rate between these two countries?
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