Describe closed and open economy goods market
Balance of Payments and Foreign Exchange Rates Assignment
This assignment examines the balance of payments and foreign exchange rates. We will define and be able to identify the balance of payments, a closed economy, an open economy, capital accounts, financial account, public and private spending, and foreign exchange rate.
This assignment is divided into two parts as follows:
Part 1: Current Account and Balance of Payments.
Part 2: Foreign Exchange Markets: Nominal and Real Exchange Rates and Foreign Exchange Rate Determination.
Part 1: Current Account and Balance of Payments
Objectives –
1. Describe closed and open economy goods market.
2. Define the current account and its importance in the global economy.
3. Interpret and measure balance of payments and its components.
LEARNING ACTIVITY-
1. Determine which account of the Balance-of-Payments is affected by each of the following transactions and the impact on the market for foreign exchange.
a) Your older brother who lives in London sends money to pay your tuition.
b) Some of the tuition money your older brother sends is used to buy a laptop from Amazon.com.
c) Carnival Cruise Lines pays for half of the cost of building the new cruise pier in your country.
d) Celine Dion performs at the Jamaica Jazz & Blues Festival.
e) In order to diversify its asset holdings a local asset management firm, buys shares of Ford Motor Company on the New York Stock Exchange.
f) Your country exports agriculture produce to the United States.
2. a) Describe the difference between foreign direct investment and foreign portfolio investment.
b) Discuss how changes in local real interest rates and foreign interest rates impact the decision to carry out investment by (i) foreigners and (ii) locals.
Part 2: Foreign Exchange Markets: Nominal and Real Exchange Rates and Foreign Exchange Rate Determination
Objectives –
1. Define foreign exchange markets.
2. Explain nominal and real exchange rates.
3. Explain the theory of purchasing power parity foreign exchange rate determination.
Assessment-
1. Illustrate and explain the impact on the real exchange rate and the trade balance due to:
a) A successful campaign encourage residents to “buy local”
b) A reduction in remittances from family overseas due to the world economic recession.
c) Excessive snowstorms during winter encourage tourist arrivals.
d) An increase in the real interest rate
2. State the impact of each of the following changes (other variables remaining unchanged) on the real exchange rate.
a) The Consumer Price Index (which measures the price level) in the United States rises by 4 percent.
b) The Consumer Price Index in Jamaica rises by 9 percent.
c) The two Consumer Price Index changes above occur at the same time.
d) The nominal exchange rate moves from 86 to 90 for a U.S. dollar.
e) The nominal exchange rate depreciates by 10 percent at the same time that local inflation is 10 percent and the U.S. price level is stable.
Parity Assessment-
1. Can you identify any implications of purchasing power parity?
2. Examine the exchange rate in your country compared to the Caribbean region. Do you see any large differentials or variations in the exchange rates?
3. Do you think LOOP really works? Give a reason for your answer?
4. If a can of spam costs $2 in the US and 6 pesos in Mexico, what would be the peso/dollar exchange rate if PPP holds?
5. If inflation is 3.5% in US and 7% in Mexico. What will happen to the peso/dollar exchange rate?
