Homework # 7

In this exercise, you will obtain and summarize data to examine our theories of 

international macro. We will use data from the World Bank World Development 

Indicators database.

 

1. Download the following data for your country for the years 2000-12: (1) Official 

exchange rate (LCU per US$, period average), (2) Consumer price index, and (3)

Net trade in goods and services. Also obtain (4) the Consumer price index for the 

US over the same period. (1) is our measure of the nominal exchange rate, (2) and 

(4) our measure of the price levels, and (3) of net exports.

 

2. For each year, calculate the percentage change in the exchange rate and in net 

exports. Are net exports generally rising or falling for your country during this 

period? Is the exchange rate appreciating or depreciating? Make a scatterplot 

showing the change in the exchange rate on the x-axis and the change in net 

exports on the y-axis. Is there a relationship between the two? Why should there 

be a relationship?

 

3. Purchasing power parity requires that the nominal exchange rate equal the ratio of 

the price level in your country to the price level in the US. For each year, 

calculate the percentage change in the exchange rate and in the ratio of the CPI in 

your country to that in the US. Make a scatterplot showing the change in relative 

prices on the x-axis and the percentage change in the exchange rate on the y-axis. 

Does PPP seem to hold? If not, what are some reasons why it may not?

 

4. We have established a relationship between net capital outflow (NCO) and the 

trade balance (net exports). During this period, is capital generally flowing into or 

out of your country (i.e., is your country a net borrower or lender in international 

capital markets)? What does this imply about your country’s rate of saving vs. 

investment, i.e., does your country save more than it invests domestically, or vice 

versa?

 

5. During the 2008 recession, many investors became concerned about the safety of 

international assets compared to US assets. What effect should this have on NCO 

in your country? How did NCO in your country change during the years 2007-

2010?