seminar week4

8/3/2019 Seminar Week4

1/28

Macroeconomics


2/28

Quizz Group 1

Exercise 1 : 6 points2 Points by right answer

Exercise 2 : 4 points2 Points : True2 Points : Right explanation

Average = 5,58/10


3/28

Quizz Group 2

Exercise 1 : 6 points2 Points by right answer

Exercise 2 : 4 points2 Points : True2 Points : Right explanation

Average = 7,73/10


4/28

Quizz (2) - Solutions

Part 1 - Complete the following table:

Year Nominal GDP Real GDP GDP deflator

1 100 100 100

2 120 100 120

3 150 125 120


5/28

Quizz (GR1) - Solutions

Part 1 - Complete the following table:

Year Nominal GDP Real GDP GDP deflator

1 80 100 80

2 80 67 120

3 150 125 120


6/28

Group Project (GR1) -TEAMS

Team A : Dutreil, Mugnier, Pelletier, Ponsford,Pozzi Rocco (5)

Team B : Cluzel, Karpowicz, Rajagopalan,Tekaya, Van Ophem (5)

Team C : Faubert, Gregoire, Qvale, Wojcik (4)

Team D : Bonthoux, Joly, Karollus, Salinier,

Tournet (5)


7/28

Group Project (GR2) -TEAMS

Team A : Delaporte, Champetier, Lahiri, Michel,Zhou (5)Team B : Blancarte, Datta, Dietrich, Nothaft,Siebken (5)Team C : Amarger, Berman, Brun, Cho, Georges(5)

Team D : Kang, Samantar, Von Dundas, Pelino(4)Team E : Fayet, Patry, Vermesch (3)


8/28

Last Week

Percentage Change :The % change of a product of two variables is

approximately the sum of the % changes in each of thevariables.

Math proof : d(PY)=YdP + PdYd(PY)/PY=dP/P + dY/Y

Investor = someone who invests its money(bonds/saving account). Not a firm/company whichborrows money.


9/28

9

National income accounts identity. Y = C + I + G + NX .Subtract C and G from both sides and obtain Y C - G = I + NX .

Lets call this S , national saving .

So, now we have S = I + NX >>>>> S I = NX .

This form of the national income accounts identity shows that aneconomys net exports must always equal the difference between itssaving and its investment .

S I = NX

Trade BalanceNet Capital Outflow


10/28

10

S

I = NX S

I = NX

If S - I and NX are positive , we have a trade surplus . We would be net

lenders in world financial markets, and we are exporting moregoods than we are importing.

If S - I and NX are negative , we have a trade deficit . We would be netborrowers in world financial markets, and we are importing more

goods than we are exporting.If S - I and NX are exactly zero , we have balanced trade since the valueof imports equals the value of exports.

Net Capital Outflow = TradeBalance


11/28

11

Nominal ExchangeRate

Real Exchange

Rate Ratio of PriceLevels

The Nominal Exchange Rate is the relative price of the currency of 2countries.The Real Exchange Rate is the relative price of the goods of 2 countries.P is the price level of the domestic country and P * is the price level of theforeign country.

If the real exchange rate is high , foreign goods are relatively cheap, anddomestic goods are relatively expensive.If the real exchange rate is low , foreign goods are relatively expensive,and domestic goods are relatively cheap.

e = e (P*/P)


12/28

12

NX( e )

Net Exports, NX

Realexchangerate, e

0

The real exchange rate is determined by theintersection of the vertical line representingS-I (Net Capital Outflow) and downward-slopingnet exports schedule.

S-I The relationship between the real exchange rate andnet exports is negative : the lower the real exchangerate, the less expensive are domestic goods relativeto foreign goods, and thus the greater are our netexports .

Here the quantity of dollarssupplied for net foreigninvestment equals thequantity of dollars by foreignersbuying our net exports.


13/28

Simple Questions

1. If net exports are positive, which of the following is false?

A. Domestic output exceeds domestic spending.B. Domestic saving exceeds domestic investment.

C. Net capital outflow is positive.D. There is a balance of trade deficit.

2. In a small open economy, the interest rate is determined by

theA. equilibrium of saving and investment.B. interest rate in the rest of the world.C. excess of government spending over government revenue.D. value of net capital outflow.


14/28

Questions/Practice Exam

1. D. If net exports are positive, there is a trade surplus.

2. In a small open economy, the interest rate is determined bythe rate in the rest of the world. The economy of a small opencountry has a negligible effect on the world economy. Theinterest rate it faces is given by the world interest rate, since

its financial markets are too small to influence it.


15/28

Exercise 1

Suppose that the expected inflation rate is 10 percent inFrance and 5 percent in Japan.The real interest rate is 3 percent in both countries.(Assume that France is the most important economy of theEuro Area)

a. What is the nominal interest rate in each country?

b. What are the expected changes in the real and nominalexchange rates?


16/28

Exercise 1 ( Contd )

c. If the European Central Bank increases the money supplyand inflation expectations rose to 12 percent in France, howwould this change affect the expected changes in the real and

nominal exchange rates ?


17/28

Answer 1

a. i = r + e

The nominal interest rate is the sum of the real interest rateand expected inflation. For France, this rate is 13 percent(3+10). For Japan, this rate is 8 percent (3+5).


18/28

Answer 1

b. Differences in inflation rates will lead to expected changesin the nominal exchange rate .% Change in e = % Change in e + ( * - )The Yen/Euro rate should decrease by the differential inexpected inflation, which is 5 percent (5-10). An Euro will buyfewer Yen.The real exchange rate is not expected to change unlessthere is a fundamental change to savings, investment, or demand for net exports.


19/28

Answer 1

c. An increase in inflation expectations in France would leadto a higher expected decrease in the Yen/Euro exchangerate. This expected decrease is now 7 percent (5-12).% Change in e = % Change in e + ( * - )

The real exchange rate should remain unchanged .


20/28

Exercise 2

The United States has run a trade deficit over the past twodecades.

Has this deficit been good or bad for the economy?

Be sure to discuss the implied change in net capital outflowand the advantages/disadvantages of this change


21/28

Answer 2

Over the past two decades, the United States has importedmore than it has exported.

This has been a benefit in the sense that consumers havebeen able to consume a wider array of goods andincrease their standard of living .

The potential downside of the increase in imports over exports is that the U.S. has had to sell assets in order topay for the excess imports , i.e. net capital outflow hasdecreased due to the trade deficit. The US spent more than

it produces by borrowing from abroad.


22/28

Answer 2 ( Contd )

If the sale of U.S. assets (borrowing from abroad) results inforeign investment in profitable ventures, the U.S. will benefitin terms of strong growth of the economy and lowunemployment.

If the trade deficit were to continue for several more decades,the concern would be over the size of foreign investment inthe U.S. This could lead to problems seen in other countrieswhen foreign investors suddenly lose faith in a country'seconomy. This loss of confidence can lead to a huge crisis asthey quickly withdraw their investments.


23/28

Exercise 3

Consider the following data on the Transalpinian economyY = 1,000C = 650G = 200I = 250 - 20r*

The world interest rate is 7.5 percent. How does the worldinterest rate have to change to make net exports zero?


24/28

Answer 3

Y = C + I + G + NX

If the world real interest rate falls to 5 percent, theninvestment will be 150, and C + I + G will be equal to Y, sothat NX will be zero.


25/28

Exercise 4

You are presented with the following foreign exchangesituation: you can trade dollars and pounds in London at arate of 1.5 $/ and in New York at a rate of 1.6 $/ .

a. Show through an example if it is possible to profit fromcurrency trading in New York and London?

b. Would you expect these rates to exist for long in the marketplace? Why or why not?


26/28

Answer 4

a. Suppose you start with $100. If you buy pounds in London,you will receive 66.67 pounds (100/1.5) for your $100. If youthen return to New York and exchange this for dollars, youwill receive $106.67(66.67*1.6). You will have just made aprofit of $6.67 .

b. If everyone tried to make a profit in this manner, the highdemand for pounds in London would drive up the value of the pound (an increase in the $/ exchange rate).

The high demand for dollars in New York would drive up thevalue of the dollar (a decrease in the $/ exchange rate).This process would continue until the exchange rates areequal, at which point there is no opportunity to profit .


27/28

Exercise 5

If the nominal exchange rate is $1 equals 150 Japanese yen,and a Big Mac costs $2 in the U.S. and 300 yen in Japan.

What is the real exchange rate of U.S. Big Macs for JapaneseBig Macs ?


28/28

Answer 5

A U.S. Big Mac would cost $2 x (150 yen/dollar) or 300Japanese yen.

This means that you could exchange 1 U.S. Big Mac for 1Japanese Big Mac.

The real exchange rate is 1.

e = e (P/P*)

seminar week4

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