Two countries, Country N in North America and Country S in South America, have the same CPI basket. Year 2000 is the CPI base year for both countries. In that year, the cost of CPI basket in Country N is $N100, and in country S is $S1000, where $N and $S are their respective currencies. Twenty years later, in 2020 , the CPI in Country N rose to 240 , and in Country S to 360. a) In the ideal world in which the purchasing power parity (PPP) holds true, what should be the nominal exchange between $S and $N in Year 2000 and in Year 2020. Show calculations and explain the change in nominal exchange rate. (5 marks) b) Suppose in reality, the nominal exchange rage between the two currencies is 18$S per $N in Year 2020. First, explain why the nominal exchange rate differs from your calculation above. Second, calculate the real exchange rate between the two countries, and explain the meaning of your calculated result. (6 marks) c) During Year 2021, the growth of the real GDP in the two countries are, 0% in country N and 5% in country S; and the growth of money supply in the two countries are, 10% in country N and 15% in country S. Give your best estimate of the nominal exchange rate between their currencies by the end of Year 2021. Show calculations. (7 marks) d) About Country N only in Year 2021, at the beginning of the year, the country had total investment in foreign assets of $N240 billions, and foreign countries had total investment in Country N's assets of $N360 billion. By end of Year 2021 , these two numbers changed to $N260 and $N410 respectively. Calculate Country N's net capital outflow (NCO) and net export (NX) for Year 2021. (7 marks) Two countries, Country N in North America and Country S in South America, have the same CPI basket. Year 2000 is the CPI base year for both countries. In that year, the cost of CPI basket in Country N is $N100, and in country S is $S1000, where $N and $S are their respective currencies. Twenty years later, in 2020 , the CPI in Country N rose to 240 , and in Country S to 360. a) In the ideal world in which the purchasing power parity (PPP) holds true, what should be the nominal exchange between $S and $N in Year 2000 and in Year 2020. Show calculations and explain the change in nominal exchange rate. (5 marks) b) Suppose in reality, the nominal exchange rage between the two currencies is 18$S per $N in Year 2020. First, explain why the nominal exchange rate differs from your calculation above. Second, calculate the real exchange rate between the two countries, and explain the meaning of your calculated result. (6 marks) c) During Year 2021, the growth of the real GDP in the two countries are, 0% in country N and 5% in country S; and the growth of money supply in the two countries are, 10% in country N and 15% in country S. Give your best estimate of the nominal exchange rate between their currencies by the end of Year 2021. Show calculations. (7 marks) d) About Country N only in Year 2021, at the beginning of the year, the country had total investment in foreign assets of $N240 billions, and foreign countries had total investment in Country N's assets of $N360 billion. By end of Year 2021 , these two numbers changed to $N260 and $N410 respectively. Calculate Country N's net capital outflow (NCO) and net export (NX) for Year 2021. (7 marks)
