International Economics Exam

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International Economics Final Exam
Chapter 10
Use the information in the following table on Switzerland’s 1998 international transactions to answer the following question (amounts are in millions of dollars)
BOP Account Amount
Merchandise Imports 92, 871
Merchandise Exports 93,859
Services Imports 15,406
Services Exports 26,683
Investment Income receipts 43, 720
Investment Income payments 27, 702
Unilateral Transfers (-) 3,736
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Calculate the trade balance? 4 points
The trade balance shows the difference between exports and imports in a country on goods and services, it is also known as net exports. Merchandise trade balance only shows the net imports of merchandise goods.
creditsdebits Trade balanceExportsMerchandise93,859Services26,683Total 120,542Imports Merchandise-92,871Services-15,406Total (108,277)Trade balance12,265
b. Calculate the current account balance? 4 points

creditsdebitsCurrent account ExportsMerchandise93,859Services26,683investment income receipts43, 720total164,262Imports Merchandise-92,871Services-15,406investment income payments-27,702total(135,979)Unilateral Transfers-3,736Current balance Account 24547
Did Switzerland become a larger international net creditor during 1998? 2 points
The current, capital, and balancing account are components of the balance of payments; receipts represent flows of foreign currency in the nation while payments are outflows. A net creditor nation typically invests resources in other countries out of surplus accounts. Thus, a net creditor nation has more assets held abroad than the value of foreign owned assets held in the country (Carbaugh, 364). The surplus (positive) current account balance of Switzerland shows that the nation is a net creditor. However, there is a need to look for more information on capital and balancing account, which may result to a deficit lance of payments.
2. Chapter 11
a) A US $ costs 0.6 British Pound but the same dollar can be purchased for 1800 Italian Lira. What is the Lira/Pound exchange rate? 5 points
1 $= 0.6 Pounds and 1$= 1800 Lira, thus 1, 800 Italian Liras are equal to 0.6 British pounds. One British pound is equal to 1800/ 0.6= 3000 Italian Liras is 1/ 1,000 which is 0.000333.
b) Suppose that on January 1, one Dollar exchanges for 100 Yen. If a Big Mac costs $2.40 in the US and 290 Yen in Japan, does the yen appear to be overvalued, undervalued, or at the PPP level? Explain. 5 points
According to the Purchasing Power Parity (PPP), there is equilibrium between exchange rates when the purchasing powers of the countries are alike. In case on inflation in one country then the exchange rate ought to depreciate in order to return to the PPP level.
Implied exchange rate =Price of Big Mac in Japanese Yen/ Price in US dollars i.e. 290/ 2.40= 120. 83.
The actual exchange rate is $1=100 Yen while the implied exchange rate = 120. 833 and the difference in percentage point is 20.833/ 100= 20.83%
The Japanese Yen is overvalued against the USD because the implied exchange rate is higher than the actual exchange rate at a rate of 20.83%, it costs less to buy 1 USD.
The exchange value is only at parity when both the implied and actual exchange rates are equal.
3. A. In your opinion, is China a currency manipulator? Give evidence in support of your answer. 5 points
With the advent of globalization international trade has gained more prominence as emerging countries export more goods than ever before. Manipulation of currencies by governments could affect international trade by making their goods relatively cheaper in the international market. When china exports goods, there is an increase in foreign currencies in the Chinese Central Bank, and a fall in the supply of the Chinese Yuan. With increased foreign reserves over the years, the Yuan ought to increase in value when the Chinese buy back the Yuan in exchange for the foreign currencies especially the dollar...