ECON 214 HW18 Open Economy Basics Assignment solutions complete answers

ECON 214 HW18 Open Economy Basics Assignment solutions complete answers

 

1. Imports, exports, and the trade balance

The following table shows the approximate value of exports and imports for the United States from 1983 through 1987.

Complete the table by calculating the surplus or deficit both in dollar terms and as a percentage of GDP. If necessary, round your answers to the nearest hundredth.

Year
GDP
Exports
Imports
Exports – Imports
(Billions of dollars)
(Billions of dollars)
(Billions of dollars)
(Billions of dollars)
(Percentage of GDP)
1983
3,535.0
277.0
328.6
 

 
 
1984
3,931.0
302.4
405.1
 

 
 
1985
4,218.0
302.0
417.2
 

 
 
1986
4,460.0
320.3
452.9
 

 
 
1987
4,736.0
363.8
508.7
 

 
 
Between 1984 and 1985, the        in dollar terms and    as a percentage of GDP.

 

The following table shows the approximate value of exports and imports for the United States from 1997 through 2001.

Complete the table by calculating the surplus or deficit both in dollar terms and as a percentage of GDP. If necessary, round your answers to the nearest hundredth.

Year
GDP
Exports
Imports
Exports – Imports
(Billions of dollars)
(Billions of dollars)
(Billions of dollars)
(Billions of dollars)
(Percentage of GDP)
1997
8,332.0
954.4
1,055.8
 

 
 
1998
8,794.0
953.9
1,115.7
 

 
 
1999
9,354.0
989.3
1,251.4
 

 
 
2000
9,952.0
1,093.2
1,475.3
 

 
 
2001
10,286.0
1,027.7
1,398.7
 

 
 
Between 1997 and 1998, the        in dollar terms and    as a percentage of GDP.

 

The following table shows the approximate value of exports and imports for the United States from 1968 through 1972.

Complete the table by calculating the surplus or deficit both in dollar terms and as a percentage of GDP. If necessary, round your answers to the nearest hundredth.

Year
GDP
Exports
Imports
Exports – Imports
(Billions of dollars)
(Billions of dollars)
(Billions of dollars)
(Billions of dollars)
(Percentage of GDP)
1968
910.0
47.9
46.6
 

 
 
1969
985.0
51.9
50.5
 

 
 
1970
1,039.0
59.7
55.8
 

 
 
1971
1,127.0
63.0
62.3
 

 
 
1972
1,238.0
70.8
74.2
 

 
 
Between 1970 and 1971, the        in dollar terms and    as a percentage of GDP.

 

2. Accounting for trade in goods and services

Suppose the following transactions occur during the current year:

1.
Carlos orders 60 bottles of wine from a French distributor at a price of $30 per bottle.
2.
A U.S. company sells 300 spark plugs to a Korean company at $5.00 per spark plug.
3.
Felix, a U.S. citizen, pays $1,100 for a laptop he orders from Mack (a U.S. company).
Complete the following table by indicating how the combined effects of these transactions will be reflected in the U.S. national accounts for the current year.

Hint: Be sure to enter a “0” if none of the transactions listed are included in a given category and to enter a minus sign when the balance is negative.

 
Amount
(Dollars)
Consumption
 
Investment
 
Government Purchases
 
Imports
 
Exports
 
Net Exports
 
Gross Domestic Product (GDP)
 
 

Suppose the following transactions occur during the current year:

1.
Larry orders 40 bottles of chartreuse from a French distributor at a price of $75 per bottle.
2.
A U.S. company sells 200 textbooks to a Canadian company at $45.00 per textbook.
3.
Raphael, a U.S. citizen, pays $670 for a skateboard he orders from Wally’s (a U.S. company).
Complete the following table by indicating how the combined effects of these transactions will be reflected in the U.S. national accounts for the current year.

Hint: Be sure to enter a “0” if none of the transactions listed are included in a given category and to enter a minus sign when the balance is negative.

 
Amount
(Dollars)
Consumption
 
Investment
 
Government Purchases
 
Imports
 
Exports
 
Net Exports
 
Gross Domestic Product (GDP)
 
 

Suppose the following transactions occur during the current year:

1.
Nick orders 50 cases of beer from a Dutch distributor at a price of $40 per case.
2.
A U.S. company sells 300 telephoto lenses to a Japanese company at $10.00 per telephoto lens.
3.
Tim, a U.S. citizen, pays $900 for a TV he orders from Cosmart (a U.S. company).
Complete the following table by indicating how the combined effects of these transactions will be reflected in the U.S. national accounts for the current year.

Hint: Be sure to enter a “0” if none of the transactions listed are included in a given category and to enter a minus sign when the balance is negative.

 
Amount
(Dollars)
Consumption
 
Investment
 
Government Purchases
 
Imports
 
Exports
 
Net Exports
 
Gross Domestic Product (GDP)
 
 

3. Factors that influence international trade

World trade has grown substantially in the last 60 years. For example, while world output grew at an annual rate of 3.8% per year between 1950 and 2003, world exports grew at 10.8% per year over the same time period.

Which of the following help to explain the increase in international trade and finance since the 1950s? Check all that apply.

 Services such as web conferencing and teleconferencing that facilitate international meetings

 Changes in exchange rates

 Better high-speed rail lines

 International trade agreements such as the North American Free Trade Agreement (NAFTA)

 

In the 1950s, imports and exports of goods and services constituted roughly 4% to 5% of U.S. GDP. In recent years, exports have accounted for approximately 11% of GDP, while imports have tripled to approximately 15% of GDP.

Which of the following help to explain the increase in international trade and finance since the 1950s? Check all that apply.

 An increasing number of affordable international flights

 International trade agreements such as the General Agreement on Tariffs and Trade (GATT)

 Higher tariffs

 The widespread use of the Internet to conduct business

 

In the 1950s, imports and exports of goods and services constituted roughly 4% to 5% of U.S. GDP. In recent years, exports have accounted for approximately 11% of GDP, while imports have tripled to approximately 15% of GDP.

Which of the following help to explain the increase in international trade and finance since the 1950s? Check all that apply.

 International trade agreements that lower tariffs and import quotas

 Improvements in telecommunications

 Improved transportation

 An increasing number of import quotas

 

4. Net capital outflow and net exports

An open economy interacts with the rest of the world through involvement in world financial markets, and also world markets for goods and services. Despite the fact that this involvement often results in an imbalance in these markets, the following identity must hold:

Net Capital OutflowNet Capital Outflow
 =  = 
Net ExportsNet Exports
That is, any transaction that affects the left side of this equation must also affect the right side. The following problem provides a scenario that illustrates why this identity must remain true.

Suppose you work as the purchasing manager for a national chain of buffet restaurants in the United States, and it is time to place your annual order of hot chili oil. You pay $2,500,000 for a shipment of chili oil from a producer in South Korea.

Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column.

Hint: The magnitude of change should always be positive, regardless of the direction of change.

 
Direction of Change
Magnitude of Change
(Dollars)
Exports
    
 
Imports
    
 
Net Exports
    
 
Because of the identity equation that relates to net exports, the    in U.S. net exports is matched by    in U.S. net capital outflow. Which of the following is an example of how the United States’ net capital outflow might be affected in this scenario? Check all that apply.

 The United States sells $2,500,000 worth of bonds to the South Korean chili oil producer.

 The South Korean chili oil producer hangs on to the $2,500,000 so that it can use the U.S. dollars to make investments.

 The South Korean chili oil producer purchases $2,500,000 worth of stock spread out over a few U.S. companies.

 

An open economy interacts with the rest of the world through involvement in world financial markets, and also world markets for goods and services. Despite the fact that this involvement often results in an imbalance in these markets, the following identity must hold:

Net Capital OutflowNet Capital Outflow
 =  = 
Net ExportsNet Exports
That is, any transaction that affects the left side of this equation must also affect the right side. The following problem provides a scenario that illustrates why this identity must remain true.

Suppose you are a fashion designer living in the United States, and a trendy boutique in Bangkok just purchased your entire inventory for THB 120,000.

Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column.

Hint: The magnitude of change should always be positive, regardless of the direction of change.

 
Direction of Change
Magnitude of Change
(Baht)
Exports
    
 
Imports
    
 
Net Exports
    
 
Because of the identity equation that relates to net exports, the    in U.S. net exports is matched by    in U.S. net capital outflow. Which of the following is an example of how the United States’ net capital outflow might be affected in this scenario? Check all that apply.

 You purchase THB 72,000 worth of stock in a Thai corporation and THB 48,000 worth of Thai bonds.

 You store the Thai baht in your safety deposit box at home.

 You exchange the THB 120,000 for dollars at your local bank, which then uses the foreign currency to purchase stock in a Thai corporation.

 

An open economy interacts with the rest of the world through involvement in world financial markets, and also world markets for goods and services. Despite the fact that this involvement often results in an imbalance in these markets, the following identity must hold:

Net Capital OutflowNet Capital Outflow
 =  = 
Net ExportsNet Exports
That is, any transaction that affects the left side of this equation must also affect the right side. The following problem provides a scenario that illustrates why this identity must remain true.

Suppose you independently contract as a software developer living in the United States, and you just sold a license for your latest program to a Belgian consumer for EUR 5,000.

Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column.

Hint: The magnitude of change should always be positive, regardless of the direction of change.

 
Direction of Change
Magnitude of Change
(Euros)
Exports
    
 
Imports
    
 
Net Exports
    
 
Because of the identity equation that relates to net exports, the    in U.S. net exports is matched by    in U.S. net capital outflow. Which of the following is an example of how the United States’ net capital outflow might be affected in this scenario? Check all that apply.

 You store the euros in your safety deposit box at home.

 You buy EUR 5,000 worth of Eurobonds.

 You purchase EUR 5,000 worth of stock in a Belgian corporation.

 

5. Saving and net flows of capital and goods

In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis.

Recall the components that make up GDP. National income (Y�) equals total expenditure on the economy's output of goods and services. Thus, where C� = consumption, I� = investment, G� = government purchases, X� = exports, M� = imports, and NX�� = net exports:

Y�
 =  = 
    
Also, national saving is the income of the nation that is left after paying for    . Therefore, national saving (S�) is defined as:

S�
 =  = 
    
Rearranging the previous equation and solving for Y� yields Y� =    . Plugging this into the original equation showing the various components of GDP results in the following relationship:

S�
 =  = 
    
This is equivalent to S� =    , since net exports must equal net capital outflow (NCO���, also known as net foreign investment).

Now suppose that a country is experiencing a trade surplus. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to).

Outcomes of a Trade Surplus
Imports
     
Exports
0
     
Net Exports
Y�
     
C+I+G�+�+�
Investment
    
Saving
0
    
 Net Capital Outflow
 

In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis.

Recall the components that make up GDP. National income (Y�) equals total expenditure on the economy's output of goods and services. Thus, where C� = consumption, I� = investment, G� = government purchases, X� = exports, M� = imports, and NX�� = net exports:

Y�
 =  = 
    
Also, national saving is the income of the nation that is left after paying for    . Therefore, national saving (S�) is defined as:

S�
 =  = 
    
Rearranging the previous equation and solving for Y� yields Y� =    . Plugging this into the original equation showing the various components of GDP results in the following relationship:

S�
 =  = 
    
This is equivalent to S� =    , since net exports must equal net capital outflow (NCO���, also known as net foreign investment).

Now suppose that a country is experiencing a trade deficit. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to).

Outcomes of a Trade Deficit
Exports
     
Imports
Net Exports
     
0
C+I+G�+�+�
     
Y�
Saving
    
Investment
Net Capital Outflow
    
 0
 

In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis.

Recall the components that make up GDP. National income (Y�) equals total expenditure on the economy's output of goods and services. Thus, where C� = consumption, I� = investment, G� = government purchases, X� = exports, M� = imports, and NX�� = net exports:

Y�
 =  = 
    
Also, national saving is the income of the nation that is left after paying for    . Therefore, national saving (S�) is defined as:

S�
 =  = 
    
Rearranging the previous equation and solving for Y� yields Y� =    . Plugging this into the original equation showing the various components of GDP results in the following relationship:

S�
 =  = 
    
This is equivalent to S� =    , since net exports must equal net capital outflow (NCO���, also known as net foreign investment).

Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to).

Outcomes of Balanced Trade
Exports
     
Imports
0
     
Net Exports
C+I+G�+�+�
     
Y�
Investment
    
Saving
Net Capital Outflow
    
 0
 

6. Pricing foreign goods

The nominal exchange rate is the price of one currency in terms of another currency. A nominal exchange rate specifies how many units of one country's currency are needed to buy one unit of another country's currency.

Suppose the following table presents nominal exchange rate data for February 28, 2019, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow.

Foreign Currency
Cost of One Unit of Foreign Currency
(Dollars)
Brazilian real (BRL)
0.4755
Canadian dollar (CAD)
0.8666
Euro (EUR)
1.2151
Japanese yen (JPY)
0.008538
Mexican peso (MXN)
0.0942
United Kingdom pound (GBP)
1.7552
Suppose that on February 28, 2019, an antique woven tapestry handmade in the United Kingdom is priced at GBP 1,710. The approximate U.S. dollar price of the tapestry would be    .

If the nominal exchange rate for the U.S. dollar–Mexican peso rises from $0.0942 to $0.11775 per Mexican peso, the Mexican peso    in value, or    , relative to the U.S. dollar.

 

The nominal exchange rate is the price of one currency in terms of another currency. A nominal exchange rate specifies how many units of one country's currency are needed to buy one unit of another country's currency.

Suppose the following table presents nominal exchange rate data for June 9, 2019, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow.

Foreign Currency
Cost of One Unit of Foreign Currency
(Dollars)
Brazilian real (BRL)
0.4755
Canadian dollar (CAD)
0.8666
Euro (EUR)
1.2151
Japanese yen (JPY)
0.008538
Mexican peso (MXN)
0.0942
United Kingdom pound (GBP)
1.7552
Suppose that on June 9, 2019, a lava stone table handmade in Japan is priced at JPY 353,010. The approximate U.S. dollar price of the table would be    .

If the nominal exchange rate for the U.S. dollar–Brazilian real falls from $0.4755 to $0.309075 per Brazilian real, the Brazilian real    in value, or    , relative to the U.S. dollar.

 

The nominal exchange rate is the price of one currency in terms of another currency. A nominal exchange rate specifies how many units of one country's currency are needed to buy one unit of another country's currency.

Suppose the following table presents nominal exchange rate data for May 21, 2019, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow.

Foreign Currency
Cost of One Unit of Foreign Currency
(Dollars)
Brazilian real (BRL)
0.3666
Canadian dollar (CAD)
0.8493
Euro (EUR)
1.3288
Japanese yen (JPY)
0.009748
Mexican peso (MXN)
0.0889
United Kingdom pound (GBP)
1.8965
Suppose that on May 21, 2019, an antique woven tapestry handmade in Germany is priced at EUR 2,270. The approximate U.S. dollar price of the tapestry would be    .

If the nominal exchange rate for the U.S. dollar–Canadian dollar rises from $0.8493 to $1.061625 per Canadian dollar, the Canadian dollar    in value, or    , relative to the U.S. dollar.

 

7. Computing real exchange rates

Suppose a fixed basket of consumer goods that costs $100 in the United States costs 300 in Malaysia.

Under a constant cost of the basket in each country, compute the real exchange rates produced by the two nominal exchange rates given in the following table.

Cost of Basket in U.S.
Cost of Basket in Malaysia
Nominal Exchange Rate
Real Exchange Rate
(Dollars)
(Ringgit)
(Ringgit per dollar)
(Baskets of Malaysian goods per basket of U.S. goods)
100
300
4.50
 
100
300
12.00
 
 

Suppose a fixed basket of consumer goods that costs $72 in the United States costs MXN 224 in Mexico.

Under a constant cost of the basket in each country, compute the real exchange rates produced by the two nominal exchange rates given in the following table.

Cost of Basket in U.S.
Cost of Basket in Mexico
Nominal Exchange Rate
Real Exchange Rate
(Dollars)
(Pesos)
(Pesos per dollar)
(Baskets of Mexican goods per basket of U.S. goods)
72
224
14.00
 
72
224
28.00
 
 

Suppose a fixed basket of consumer goods that costs $18 in the United States costs JPY 570 in Japan.

Under a constant cost of the basket in each country, compute the real exchange rates produced by the two nominal exchange rates given in the following table.

Cost of Basket in U.S.
Cost of Basket in Japan
Nominal Exchange Rate
Real Exchange Rate
(Dollars)
(Yen)
(Yen per dollar)
(Baskets of Japanese goods per basket of U.S. goods)
18
570
95.00
 
18
570
76.00
 
 

8. Purchasing-power parity

Using data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in the United States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:

Dollar price of a Big Mac in the United KingdomDollar price of a Big Mac in the United Kingdom
 =  = 
GBP 3.29×$1.25GBP 1.00GBP 3.29×$1.25GBP 1.00
 
 =  = 
$4.11$4.11
For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries!

Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given.

Note: Round your answers to the nearest cent.

 
Big Mac Index: January 2019
Local Price
Actual Exchange Rate
Dollar Price
(Foreign currency)
(Dollars per unit of foreign currency)
(Dollars)
Euro area
4.08
1.12
 

 
Switzerland
6.50
1.01
 

 
United Kingdom
3.29
1.25
4.11
Poland
10.80
0.26
2.81
China
 21.00
0.14
2.94
Source: “The Big Mac Index, Our Interactive Currency Comparison Tool,” The Economist, last modified January 10, 2019, accessed September 27, 2019, https://www.economist.com/news/2019/07/10/the-big-mac-index.

Purchasing-power parity (PPP) theory states that exchange rates would need to equalize the prices of goods in any two countries. For the dollar price of a Big Mac to be the same in both countries, a U.S. citizen would need to be able to convert $5.74 into exactly GBP 3.29. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom:

PPP Exchange Rate (U.S. Dollars per British pound)PPP Exchange Rate (U.S. Dollars per British pound)
 =  = 
$5.74GBP 3.29$5.74GBP 3.29
 
 =  = 
$1.74 per pound$1.74 per pound
The exchange rate that would have equalized the dollar price of a Big Mac in the United States and the Euro area (that is, the PPP exchange rate for Big Macs) is    . This change would mean that the euro had    against the dollar.

If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage opportunity? Check all that apply.

 Exporting Big Macs from the United Kingdom to Poland

 Exporting Big Macs from Switzerland to China

 Exporting Big Macs from the Euro area to the United States

 

Using data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in the United States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:

Dollar price of a Big Mac in the United KingdomDollar price of a Big Mac in the United Kingdom
 =  = 
GBP 3.29×$1.25GBP 1.00GBP 3.29×$1.25GBP 1.00
 
 =  = 
$4.11$4.11
For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries!

Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given.

Note: Round your answers to the nearest cent.

 
Big Mac Index: January 2019
Local Price
Actual Exchange Rate
Dollar Price
(Foreign currency)
(Dollars per unit of foreign currency)
(Dollars)
Argentina
120.00
0.02
 

 
Norway
42.00
0.12
 

 
United Kingdom
3.29
1.25
4.11
Poland
10.80
0.26
2.81
China
 21.00
0.14
2.94
Source: “The Big Mac Index, Our Interactive Currency Comparison Tool,” The Economist, last modified January 10, 2019, accessed September 27, 2019, https://www.economist.com/news/2019/07/10/the-big-mac-index.

Purchasing-power parity (PPP) theory states that exchange rates would need to equalize the prices of goods in any two countries. For the dollar price of a Big Mac to be the same in both countries, a U.S. citizen would need to be able to convert $5.74 into exactly GBP 3.29. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom:

PPP Exchange Rate (U.S. Dollars per British pound)PPP Exchange Rate (U.S. Dollars per British pound)
 =  = 
$5.74GBP 3.29$5.74GBP 3.29
 
 =  = 
$1.74 per pound$1.74 per pound
The exchange rate that would have equalized the dollar price of a Big Mac in the United States and Argentina (that is, the PPP exchange rate for Big Macs) is    . This change would mean that the peso had    against the dollar.

If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage opportunity? Check all that apply.

 Exporting Big Macs from Norway to Poland

 Exporting Big Macs from Norway to China

 Exporting Big Macs from Argentina to the United States

 

Using data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in the United States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:

Dollar price of a Big Mac in the United KingdomDollar price of a Big Mac in the United Kingdom
 =  = 
GBP 3.29×$1.25GBP 1.00GBP 3.29×$1.25GBP 1.00
 
 =  = 
$4.11$4.11
For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries!

Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given.

Note: Round your answers to the nearest cent.

 
Big Mac Index: January 2019
Local Price
Actual Exchange Rate
Dollar Price
(Foreign currency)
(Dollars per unit of foreign currency)
(Dollars)
Brazil
17.50
0.26
 

 
Norway
42.00
0.12
 

 
United Kingdom
3.29
1.25
4.11
Poland
10.80
0.26
2.81
China
 21.00
0.14
2.94
Source: “The Big Mac Index, Our Interactive Currency Comparison Tool,” The Economist, last modified January 10, 2019, accessed September 27, 2019, https://www.economist.com/news/2019/07/10/the-big-mac-index.

Purchasing-power parity (PPP) theory states that exchange rates would need to equalize the prices of goods in any two countries. For the dollar price of a Big Mac to be the same in both countries, a U.S. citizen would need to be able to convert $5.74 into exactly GBP 3.29. To find the exchange rate at which hamburger purchasing power is the same in both countries, divide the price in the United States by the price in the United Kingdom:

PPP Exchange Rate (U.S. Dollars per British pound)PPP Exchange Rate (U.S. Dollars per British pound)
 =  = 
$5.74GBP 3.29$5.74GBP 3.29
 
 =  = 
$1.74 per pound$1.74 per pound
The exchange rate that would have equalized the dollar price of a Big Mac in the United States and Brazil (that is, the PPP exchange rate for Big Macs) is    . This change would mean that the real had    against the dollar.

If Big Macs were a durable good that could be costlessly transported between countries, which of the following would present an arbitrage opportunity? Check all that apply.

 Exporting Big Macs from Norway to China

 Exporting Big Macs from Brazil to the United States

 Exporting Big Macs from Norway to Poland