MacroEconomics Question

Bex2

Trying to figure a few Macro Economic problems for a 2nd yr College repeat exam. Any didactic attempted answers very welcome!


Suppose the (nominal) exchange rate in May 2008 is $1.25 = €1.00, and that inflation over the following year is 2% in the Euro zone and 5% in the USA.

What (approx) would be the exchange rate in May 2009 if Purchasing Power Parity were to hold?

http://en.wikipedia.org/wiki/Purchasing_power_parity#Relative_PPP

Économiste Monétaire

Second year Macro... you were taught something along the lines of this?

E = Nominal exchange rate
e = real exchange rate
[latex]\displaystyle P_D[/latex] = Domestic Price level
[latex]\displaystyle P_F[/latex] = Foreign Price Level

[latex]\displaystyle\%\bigtriangleup e=\%\bigtriangleup E %2B\%\bigtriangleup P_D - \%\bigtriangleup P_F=0[/latex]


[latex]\displaystyle \%\bigtriangleup E %2B 2\% - 5\%=0[/latex]

E = 1.25(1.03) = 1.2875

gerry87

Instead of trying to remember formulas, try and think it through. Today you can buy $1.25 and it costs you €1.00.

Next year the dollars increase by 5% to ($1.25)(1.05) = $1.3125.

The Euros increase by 2% to (€1)(1.02) = €1.02

So next year the new exchange rate is:

$1.3125 = €1.02
$(1.3125/1.02) = €1 (dividing both sides by 1.02)
$1.28764 = €1

---

The general formula would be:
[LATEX](\$x)(1 %2B i_{dollar}) = (\eur x)(1 %2B i_{euro})[/LATEX]
[latex](\$x)(1 %2B i_{dollar})/(1 %2B i_{euro}) = \eur x[/latex]

The way Économiste Monétaire did it was an approximation using the fact that when the percentages are small, which is probably the one you're looking for since they ask for an approx, but they can't blame you for being righter!

[latex](1 %2B i_{dollar})/(1 %2B i_{euro}) \approx i_{dollar}-i_{euro}[/latex]

Time Magazine

gerry87 wrote: »

The way TheEconomist did it was an approximation

Other people may want to be me, but they fail in their attempts.

gerry87

The Economist wrote: »

Other people may want to be me, but they fail in their attempts.

Apologies, depending on which one of you I offended there! :P

(you're quick!)

Bex2

Thanks guys! your answers are very helpful! Cheers!

I'm confused..

GDP per capita is simply GDP/Population and is expressed in units of local currency.
You can convert the currency into anything you like really.