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International Economics Assignment

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Please answer all the questions by tonight please. I’ve attached the textbook which will be really helpful in locating answers.

International Economics (EC O221/1000)

Do all questions

  1. a. If the exchange rate changes from $1.75 to £1, to $1.79 to £1, What does this means for the dollar? For the pound? What if the exchange rate changes from $1.80 = £1 to $1.75 = £1?

     b. Suppose $1.70 = £1 in New York and $1.65 = £1 in London. How can foreign exchange arbitragers profit from this exchange rate? Explain how foreign exchange arbitrage results in the same dollar/pound exchange rate in New York and London.

2. Assume that the United States exports 2,000 computers costing $5,000 each to the UK, and imports 200 UK autos at a price of £12,000 each. Assume that the dollar/pound exchange rate is $1.75 per pound.

Calculate in dollar terms:

a. The US export receipt

b.US import payments

c. Trade balance

d. Suppose the dollar’s exchange value depreciates by 10%. Assuming that the price elasticity of demand for exports for U S equals 0.5 and price elasticity of demand for US imports equals 0.2, does the dollar depreciation improve or worsen the US trade balance? Why?

e. Now assume that the price elasticity of demand for US exports equals 2 and price elasticity of demand for US imports equals 1. Does this change the outcome? Why?

3. Suppose ABC Inc., a U.S. auto manufacturer, obtains all of its auto components in the United States and that its costs are denominated in dollars. Assume that the dollar’s exchange value appreciates by 50% against the Mexican peso. What impact does the dollar appreciation have on the firm’s international competitiveness? What about a dollar depreciation?

4. What factors underlie a nation’s decision to adopt floating exchange rates or fixed exchange rates? Page 460

5. Complete this hypothetical case of US balance of payments for 1950 (Billion of dollars)

Goods export  $20

Services Export $5

Income from foreign investment $11

Unilateral transfer receipts $2

Services imports -$6

Payments to foreign investments -$8

Unilateral transfer payments -$7

Goods import -$23

U.S owned assets abroad -$10

Foreign-owned assets in the U.S. $13

Merchandise trade balance ?

Goods and service balance ?

Current account balance ?

Capital and financial account balance ?

Statistical discrepancies ?

6. In comparing the US dollar to the Euro, explain how changes in US price levels, productivity, preference, and US trade barriers can affect the dollar’s exchange rate in the long run.

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