Consider two countries, say the United States and Japan. Both countries produce tradables and nontradables. Suppose that at some point in time the production technology in the United States is described by and Q US US aLs; with a=0.4 US,US LT QaLS; with a = 0.3 US where Q and Q denote, respectively, output of tradables and nontradables in the U.S., a and a denote, respectively, labor productivity in the traded and the nontradable sector, and LUS and LUS denote, respectively, the amount of labor employed in the tradable and nontradable sectors in the United States. The total supply of labor in the United States is equal to 1, so that 1 = LUS+L. At the same point in time, production possibilities in Japan are given by and Q+= 0.21 Q=0.31%, where the superscript J denotes Japan. The total supply of labor in Japan is also equal to 1. Assume that in each country wages in the traded sector equal wages in the nontradable sector. Suppose that the price index in the United States, which we denote by pls, is given by = PUS where PS and PS denote, respectively, the dollar prices of tradables and nontradables in the United States. Similarly, the price index in Japan is given by where Japanese prices are expressed in yen. 1. Sp Calculate the dollar/yen real exchange rate, defined as e, where S denotes the dollar-yen nominal exchange rate (dollar-price of one yen).
Consider two countries, say the United States and Japan. Both countries produce tradables and nontradables. Suppose that at some point in time the production technology in the United States is described by and Q US US aLs; with a=0.4 US,US LT QaLS; with a = 0.3 US where Q and Q denote, respectively, output of tradables and nontradables in the U.S., a and a denote, respectively, labor productivity in the traded and the nontradable sector, and LUS and LUS denote, respectively, the amount of labor employed in the tradable and nontradable sectors in the United States. The total supply of labor in the United States is equal to 1, so that 1 = LUS+L. At the same point in time, production possibilities in Japan are given by and Q+= 0.21 Q=0.31%, where the superscript J denotes Japan. The total supply of labor in Japan is also equal to 1. Assume that in each country wages in the traded sector equal wages in the nontradable sector. Suppose that the price index in the United States, which we denote by pls, is given by = PUS where PS and PS denote, respectively, the dollar prices of tradables and nontradables in the United States. Similarly, the price index in Japan is given by where Japanese prices are expressed in yen. 1. Sp Calculate the dollar/yen real exchange rate, defined as e, where S denotes the dollar-yen nominal exchange rate (dollar-price of one yen).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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VIEWStep 2: Calculate dollar/yen real exchange rate (e)
VIEWStep 3: Calculate the growth rate of the real exchange rate
VIEWStep 4: Calculate dollar/yen real exchange rate (e) for this price index
VIEWStep 5: Calculate dollar/yen real exchange rate (e) for this labor productivity
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