Welcome to EC 382 International Economics By Dr

Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani Week Twelve 1

Week Twelve: Class 1 Tuesday, November 20 n 14: 10 -15: 00 AC 202 n 2

I received a mail n We are all under a lot of stress at the moment and we were just wondering if you had any hints for us for the test? ? ? It would be greatly appreciated! n No 3

Another question n hi, i just want to clarify the chapters for the exam. 1 -8, 11, 13, 14, 15. so that means we don't have to study chapters 9, 10 and 12? ? ? n Yes, you are right. 4

By the way Expect n Your last ICA tomorrow n 5

Recall the Law of One Price n n Same goods have the same price in terms of the same currency in different countries. PU. S. = [R($/£)] * PU. K. R = Exchange rate, number of dollars need to get one Pound PU. S. = Price of the good in U. S. PU. K. = Price of the good in U. K. n Rearranging the equation we get: [R($/£)] = PU. S. /PU. K. – Exchange rate between currencies should be equal to ratio of prices. 6

Purchasing Power Parity (PPP) n Extends the law of one price to a market basket of goods. – Exchange rate between two countries should equal the ratio of the price levels in those countries. 7

PPP Example n If the price level in U. S. increases relative to the price level in U. K. – U. S. imports of U. K. goods increase and exports would decrease. – Dollar would depreciate. 8

PPP is a long-run concept like the law of one price. n Normally, a country’s current exchange rate is never equal to its PPP value. n But still it is a useful benchmark 9

Over valued / Undervalued Currency n n If the value of a currency is above its PPP level overvalued If the value of a currency is below its PPP level undervalued 10

Absolute Purchasing Power Parity [R($/£)] = PU. S. /PU. K. n PU. S. and PU. K. now refer to the price of a particular market basket of tradable goods. 11

Example n If PU. S. = $1000 and PU. K. = £ 500 – then the exchange rate is n n $2/Pounds If prices doubled in the U. S. but were unchanged in U. K. , – then the PPP exchange rate n n n would move to $4/Pound PPP exchange rate rises to offset the dollar’s lower purchasing power. The exchange rate may change in nominal terms, but the real value of goods purchased is the same. 12

Relative Purchasing Power Parity n Example n If U. S. inflation was 10% and only 5% for the U. K. in one year n the U. S. dollar would depreciate by 5% 13

There is not a lot of empirical evidence for PPP n 1. 2. Why? How do different countries measure the price level? – CPI, GDP deflator, PPI Even if they all go with CPI n The baskets do not have the same goods n The baskets have some non-tradable goods & services n The weight that each good has may not be the same across nations n Gasoline may have more weight in the US basket than in the UK basket n Less public transportation in US n Longer distances in US 14

Now, we would like to n Wish Luke Barry a very happy birthday. From: Frank (the Tank) Crowe & the rest of us 15

Recap PPP suggests that nominal exchange rates depend on the relative price levels n But what affects the price levels? n – demand for goods and services – supply of goods and services 16

The role of money Let’s express demand for money this way n MD = k * P * Y n Y is our real income (real GDP) P * Y is our nominal income (nominal GDP) k is the proportion of nominal income held as money 17

When money market is in equilibrium MD = MS n SO n MS = k * P * Y Solving for P P = MS/k*Y 18

In US & UK PUS = MSUS / k. US * YUS PUK = MSUK / k. UK * YUK Taking a ratio of these equations we can get Price ratio between the U. S. and U. K. 19

International Economics n Week Twelve –Class 2 – Wednesday, November 21 – 11: 10 -12: 00 – Tyndall 20

n On line grades are up to date – Check your n ID numbers n grades n and let me know if there is an error n OCA is graded and available 21

OCA 1 Key to Question 1 Each part had 2 points. Visit the WTO’s web page at wto. org to answer the following questions: a) b) c) Is Iran a member of WTO? How about Iraq? • Which country is the newest member of WTO? • Tonga Is the following statement true or false? Explain. “WTO is for free trade at any cost. ” • d) e) No & No False; “It’s really a question of what countries are willing to bargain with each other, of give and take, request and offer. ” Is the following statement true or false? Explain. “The voting power of a nation that is a member of WTO depends on its GDP. ” • False; each member has one vote. What was the size of the WTO’s budget last year? • 175 million Swiss francs 22

Question 2 had 10 points Search the web (or elsewhere) for at least two examples of countervailing and/or antidumping duties imposed by the U. S. in the recent years. Name the products and their exporting countries and the nature of the imposed duties. Clearly list your sources. 23

How will I figure your assignment grade? 1. We had a total of 6 assignments n n n 2. 4 had 6 points each 1 had 10 points 1 had 20 points I will convert all to 20 points assignments n Example: If you received 3 out of 6 on one assignment, I will record 10 out of 20 3. 4. I will drop the lowest grade Add up the rest n Max = 100 points 24

My Request n n 1. 2. n Go to my website at www. marietta. edu/~khorassj Click on Let me hear from you Choose EC 382: International Economics Answer the following questions What were the strengths of this course and/or the instructor? What were the weaknesses of this course and/or the instructor? Be as specific as you can please. 25

I did not receive any questions from you n n 1. 2. We will cancel this afternoon’s class Instead Keep on sending your questions to me. I will post the answer to general questions and those questions that come to me via anonymous feedback on line on my website. 26

Long run relationship between nominal exchange rate, money supply, real GDP and more 27

If money supply rises faster in US than in UK n – – – Prices will grow faster in US than in UK UK residents buys fewer US goods UK residents buy fewer dollars n n Dollar depreciates in the long run Pound appreciates in the long run 28

• If the proportion of money people want to hold (k) increases in US. • • Means that people want to hold on to money instead of spending it US Prices go down UK residents would want to buy more US goods Dollar appreciates in the long run & pound depreciates 29

• If real GDP in US increases faster than in UK • Means production in the US grew faster • To sell the extra goods, US prices go down • UK residents buy more US goods • Dollar appreciates in the long run 30

The Real Exchange Rate n n n We observe nominal exchange rates – not real exchange rates. May assume that changes in nominal rates mean foreign goods are necessarily cheaper in real terms Can make bad business decisions if consider only nominal rates and not real exchange rates 31

The Real Exchange Rate n Real Exchange Rate (RXR): – Relative price of two currencies after adjusting for changes in domestic price within the two countries 32

Example n n n The price levels are 50 and 100 in UK and US respectively. Nominal exchange rate is $3/£ What is real exchange rate? 33

International Economics n Week Twelve - Class 3 – Wednesday, November 21 – 15: 10 -16: 00 – AC 201 n Class canceled 34