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Consider the United States and the countries it trades with the most (measured in trade volume): Canada, Mexico, China, and Japan. For simplicity, assume these
Consider the United States and the countries it trades with the most (measured in trade volume): Canada, Mexico, China, and Japan. For simplicity, assume these are the only four countries with which the United States trades. Trade shares and exchange rates for these four countries are as follows: a) b) C) d) Country (currency) ' Share of trade $ per FX in 2020 $ per FX in 2021 Mexico (peso) 36% 0.0465 0.0503 Canada (dollar) 28% 0.7455 0.7879 China (yuan) 20% 0.1449 0.1552 Japan (yen) 16% 0.0094 0.0091 Compute the percentage change from 2020 to 2021 in the four U.S. bilateral exchange rates (de- ned as U.S. dollars per units of foreign exchange, or FX) in the table provided. Use the trade shares as weights to compute the percentage change in the nominal effective exchange rate for the United States between 2020 and 2021 (in US. dollars per foreign currency basket). Based on your answer to (b), what happened to the value of the U.S. dollar against this foreign currency basket between 2020 and 2021 (or the value of the foreign currency basket against this US dollar)? Based on your answer to (b), how does this change in the effective exchange rate compare with the change in the value of the US. dollar relative to the Japanese yen (or the change in the dollar value of the yen)? Compare in terms of the sign (increase or decrease) and the magnitude (how much)
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