Welcome to EC 382 International Economics By Dr Jacqueline Khorassani Week Twelve 1 Week Twelve Class 1 Tuesday November 20 14 10 15 00 AC 202 2 I received a mail 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 No 3 Another question 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 Yes you are right 4 By the way Expect Your last ICA tomorrow 5 Recall the Law of One Price 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 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 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 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 Normally a country s current exchange rate is never equal to its PPP value But still it is a useful benchmark 9 Over valued Undervalued Currency 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 PU S and PU K now refer to the price of a particular market basket of tradable goods 11 Example If PU S 1000 and PU K 500 then the exchange rate is 2 Pounds If prices doubled in the U S but were unchanged in U K then the PPP exchange rate 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 XR PU S PU K Example If U S inflation was 10 and only 5 for the U K in one year the U S dollar would depreciate by 5 13 There is not a lot of empirical evidence for PPP 1 2 Why How do different countries measure the price level CPI GDP deflator PPI Even if they all go with CPI The baskets do not have the same goods The baskets have some non tradable goods services The weight that each good has may not be the same across nations Gasoline may have more weight in the US basket than in the UK basket Less public transportation in US Longer distances in US 14 Now we would like to 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 But what affects the price levels demand for goods and services supply of goods and services 16 The role of money Let s express demand for money this way MD k P Y 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 SO MS k P Y Solving for P P MS k Y 18 In US UK PUS MSUS kUS YUS PUK MSUK kUK YUK Taking a ratio of these equations we can get Price ratio between the U S and U K PUS MSUS kUK YUK PUK MSUK kUS YUS 19 International Economics Week Twelve Class 2 Wednesday November 21 11 10 12 00 Tyndall 20 On line grades are up to date Check your ID numbers grades and let me know if there is an error OCA is graded and available 21 OCA1 Key to Question 1 Each part had 2 points Visit the WTO s web page at wto org to answer the following questions a Is Iran a member of WTO How about Iraq b Which country is the newest member of WTO c 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 e Tonga Is the following statement true or false Explain WTO is for free trade at any cost d No No 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 2 We had a total of 6 assignments 4 had 6 points each 1 had 10 points 1 had 20 points I will convert all to 20 points assignments 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 Max 100 points 24 My Request 1 2 Go to my website at www marietta edu khorassj Click on Let me hear from you Choose EC382 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 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 PUS MSUS k UK YUK R PUK MSUK k US YUS 27 PUS MSUS k UK YUK R PUK MSUK k US YUS If money supply rises faster in US than in UK Prices will grow faster in US than in UK UK residents buys fewer US goods UK residents buy fewer dollars Dollar depreciates in the long run Pound appreciates in the long run 28 PUS MSUS k UK YUK R PUK MSUK k US YUS If the proportion of money people want to hold k increases in US Means that people want to …