1. The International Comparison Program shows that the Price Level Index for China was

54. By comparison the 2005 International Comparison Program showed a price level

index for China of 42. By construction, the Price Level Index for the United States

is always 100. Using data on the nominal exchange rate you learn that the nominal

exchange between Yuan-Dollar was 8.195 in 2005 and 6.461 in 2011 (so the Chinese

currency depreciated).

(a) Find the percent change in the Yuan-dollar real exchange rate between 2005 and

2011.

(b) In 2005 the size of the Chinese economy, at PPP exchange rates, was 43 percent

that of the U.S. economy. Ignoring growth in physical output, nd the size of

the Chinese economy, at 2011 PPP exchange rates, relative to that of the U.S.

economy.

(c) Suppose that all of the observed real exchange rate appreciation was due to the

imposition of import taris by China. Assume that in the U.S. and China the price

level is given by,

P = P_X+ P_M^1-

where = 0:5, P_X and P_M denote export and import prices, respectively, and

that- absent tariF- the law of one price holds. Find the size of the import tariffs