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Name:...........................................................
M. Muniagurria
Econ 464
Fall 2015
Exam 3 (90 points)
(I) Intertemporal Consumption Choice
Consider the model of used in class. As usual there are two countries (call them East and West) with positive
endowments of t=0 good (E0E > 0 , E0W>0) that can be transformed into t=1 good.
The PPF frontiers between t=0 and t=1 good are “nice”. East has a comparative advantage in the production of
t=0 good and West a comparative advantage in the production of t=1 good.
If a country borrows at time 0 from the other it will do so by issuing an IOU in exchange for the consumption
good. If instead a country lends time 0 good to the other, it will receive in exchange an IOU issued by the other
country.
Assume that the countries are trading in t=0 and t=1 goods and that the free trade interest rate is identified as r*.
(1) (6 pts) Draw a diagram that shows East’s production and consumption points in both periods under
free trade with West (use the vertical axis for time 1 good and the horizontal axis for time 0 good).
Identify physical investment in period t=0.
(2) (8 pts) Consider the BOP of country East in both periods. Identify the credits /debits and the BOP
accounts where they belong. Justify your choice. Use attached BOP for help with the FA signs.
Suppose that suddenly West discovers a better technology to transform t=0 good into t=1 good. Answer
questions (3) and (4) assuming that everything else remains the same and the two countries continue to trade
freely.
(3) (9 pts) What will happen to West’s PPF? What will happen to the equilibrium free trade interest
rate? Justify using a diagram of the World Relative Supply and World Relative Demand and a clear
explanation. Make sure you label your axes and curves.
(4) (9 pts) What will happen to East’s consumption in periods 0 and 1 as a result of the change in the
interest rate? Justify your answer using a clear explanation and a Diagram.
(II) GATT/WTO/PTAs
(1) (5 pts) Briefly explain the meaning/interpretation of Non Discrimination within the GATT/WTO.
(2) (6 pts) Briefly explain what is trade diversion in the context of Preferential Trade Agreements (no diagram
needed).
(3) (6 pts) Write a complete paragraph relating the TTP (Trans Pacific Partnership) and TTIP (Transatlantic
Trade and Investment Partnership) agreements to the concepts of deep and shallow integration
(III) Medium/Short Questions on International Finance
(1) (18 pts: 6 each) The two diagrams below show the nominal China/US exchange rate (E in our notation) and
the Real Exchange Rate (e in our notation) for the Renminbi/Yuan
Consider the periods 2002-05 and 2009-10.
a) What can you infer about the behavior of the Chinese government in the foreign exchange market
looking at the nominal exchange rate?
b) What can you infer about the price movements in China and in the US during each one of the
periods?
Consider the period 2011-14
c) Is the Renminbi appreciating or depreciating against the dollar in real terms? What are the possible
effects on the China’s current account?
Real Exchange Rate China
(up indicates an increase in Chinese prices in dollars relative to US prices in dollars)
(2) (8 pts) The chart below shows Savings, Investment and Current Account balance for US and Japan. Write a paragraph
focusing on the main differences between the two countries
(3) BOP Transactions (See attached BOP)
For each of the following transactions indicate on which account the credit and the debit occur in the US
balance of Payments (identify the account number). Use the attached BOP for guidance with the accounts.
Here is the list of transactions you need to identify:
(a) (5 pts) A US agent imports tools from Germany. He pays with Euros.
(b) (5 pts) A US firm exports wheat to China. It gets payment in dollars.
(c) (5 pts) A US investment firm sells its holdings of Renault (French firm) shares. It receives payment
in Euros.