Download The Nominal Exchange Rate is 11 Mexican Pesos for 1 US Dollar

The Nominal Exchange Rate is 11 Mexican Pesos for 1 US Dollar
A bottle of vanilla in the US is $15
A bottle of vanilla in Mexico is 140 Pesos
Do the following to calculate the Real Exchange Rate:
Converting US price to foreign currency, you have: _$15 * 11 = 165 pesos_
Spending that foreign currency in the foreign country, you can buy how many goods: _165 /
140 = 1.18 = real exchange rate_
Is the real exchange ( greater than / less than ) one?
Because of this, people in the US should buy ( US / Foreign ) goods
Because of this, people in the Foreign country should buy ( US / Foreign, their own) goods
If people spend as suggested above, what will that cause?
Price in US will fall (no one is buying US goods)
Price in Mexico (Foreign) will rise (everyone is buying it)
Real exchange rate will fall (because of the price changes)
What would prevent the real exchange rate from moving as predicted above?
There could restrictions on importation of vanilla (contains a lot of alcohol)
Could be expensive to transport
Quality differences: Mexican vanilla is inferior to domestic (in truth, Mexican vanilla is
often vanilla).
If NER went to 12 pesos per dollar, we would say the dollar ( appreciated / depreciated )
Consider the following transactions:
The US buys $150 million of electronics from China
China buys $80 million of stock in Cisco
The US builds an iPod factory in China at a cost of $30 million
China buys $120 million of SUV’s from the US
The US buys $60 million of clothing from China
China buys $30 million of real estate in the US
What is the US trade balance?
= $120 (export of SUV’s) - $150 (import electronics) - $60 (import clothing)
= - 90 million
What is US Net Capital Outflow?
= - 90 million
easiest way to get this is to use that Trade Balance = NCO
What is China’s trade balance?
= + 90 million
This must be the opposite (in sign) from US trade balance
How much is China’s portfolio foreign investment in the US?
China’s portfolio investments:
$80 million stock
$30 million real estate
$10 million US money (if you work through all the exchanges above, China
ends up acquiring an additional $10 million of US money)
=$120 million
Population = 95 million
# people working = 40 million
# people searching for work = 5 million
What is the unemployment rate?
= 5 / 40 + 5 = 1 / 9 = .11 = 11%