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

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Welcome to EC 382 International EconomicsBy
Dr. Jacqueline Khorassani

• Week Twelve

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Week Twelve Class 1

• Tuesday, November 20
• 1410-1500AC 202

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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

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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.

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By the way

• Expect
• Your last ICA tomorrow

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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.

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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.

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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.

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PPP is a long-run concept like the law of one
price.

• Normally, a countrys current exchange rate is
  never equal to its PPP value.
• But still it is a useful benchmark

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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

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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.

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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 dollars
  lower purchasing power.
• The exchange rate may change in nominal terms,
  but the real value of goods purchased is the
  same.

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Relative Purchasing Power Parity

• 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

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There is not a lot of empirical evidence for PPP

• 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

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Now, we would like to

• Wish Luke Barry a very happy birthday.

From Frank (the Tank) Crowe the rest of us
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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

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The role of money

• Lets 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

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When money market is in equilibrium

• MD MS
• SO
• MS k P Y
• Solving for P
• P MS/kY

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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.

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International Economics

• Week Twelve Class 2
• Wednesday, November 21
• 1110-1200
• Tyndall

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• 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

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OCA1 Key to Question 1Each part had 2 points.

• Visit the WTOs web page at wto.org to answer the
  following questions
• Is Iran a member of WTO? How about Iraq?
• No No
• 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.
• False Its 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 WTOs budget last year?
• 175 million Swiss francs

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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.

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How will I figure your assignment grade?

• 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
• I will drop the lowest grade
• Add up the rest
• Max 100 points

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My Request

• 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.

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I did not receive any questions from you

• We will cancel this afternoons 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.

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

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• 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

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• 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

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The Real Exchange Rate

• 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

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The Real Exchange Rate

• Real Exchange Rate (RXR)
• Relative price of two currencies after adjusting
  for changes in domestic price within the two
  countries

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Example

• The price levels are 50 and 100 in UK and US
  respectively.
• Nominal exchange rate is 3/
• What is real exchange rate?

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International Economics

• Week Twelve - Class 3
• Wednesday, November 21
• 1510-1600
• AC 201
• Class canceled