FREC 410
HW Assignments #4
Macroeconomic Policies, Exchange Rates and Trade
NOTE: Carefully review and provide detailed responses to the following questions. These questions are
mostly based on materials covered in our class lectures and the assigned readings from the textbook.
1) Briefly explain the following terms
a) Balance of payments (BOP)
b) Current account balance
c) Foreign direct investment (FDI)
d) Internalization advantages
e) Arbitrage and triangular arbitrage
f) Purchasing power parity (PPP)
g) Exchange rate overshooting
h) Floating exchange rate system
2) Data Analysis: Comparison of exchange rates for various countries
a) Obtain MONTHLY data for US dollar exchange rates (from 2000 to 2008) for the following
eight countries: Australia, UK, Japan, China, Canada, Brazil, Mexico, and Nigeria
Hint: you can find data online (e.g., FED at St. Louis)
Note: Clearly note the websites where you obtained your data
b) Graph (using EXCEL): show the time plot of the exchange rates over time (eight lines on the
same graph).
Note: clearly label the graphs and indicate which line is which nation’s currency.
c) Identify the name for each nation’s currency
d) Compute the average (mean) exchange rate for each nation for: (2003-2005) and (2006-2008)
e) State whether each of the national currencies had appreciated or depreciated against the US
dollar over the two time periods in (c) above
f) Briefly indicate how the change in exchange rate in each case affects US agricultural exports
or imports with each of these nations
3) Effects of Exchange Rates:
(i) Graphically illustrate and discuss the effects of the exporting country overvaluation on the:
a) supply,
b) demand,
c) price in both countries and world price and trade world volume
(ii) Discuss the welfare effects in terms of producer and consumer surpluses and government
revenue in the:
a) importing country
b) exporting country
Hint: Use similar approach as with the import tariff/export tax analysis in course lectures
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