Posted: March 27th, 2015

Money and Finance

Money and Finance

Order Description

The answers must include graphs, diagrams on excell

1.    Go to the website for the University of Pennsylvania World Tables 7.1:
https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php
(a)    Choose seven countries: Canada, China (use version 2), Japan, the U.K. , Pakistan, Netherland and Turkey.
(b)    Choose the variables P (Price Level of Gross Domestic Product) and XRAT (Exchange Rate). Choose the option “add all” for years.
(c) Under output format, choose “comma separated values .csv”.
(c)    Copy the result and then copy and paste the data into an excel spreadsheet. The data will all be sitting in one column so choose text to columns in the Data toolbar. Choose commas for the delineations and this will spread the data into the columns on the right.
(d)    Invert the variable P and multiply by 100, i.e. calculate 100/P. This is the Real Exchange Rate relative to the US$.  Normalise the value of XRAT so that the first year in the data series (usually 1950, but for some countries such as China it starts a few years later) is equal to 100/P. Then divide all subsequent values of XRAT by this normalised initial ratio of XRAT1950/RealExchangeRate1950. The idea here is to be able to compare the movements of the real and nominal exchange rates on the same axes.
(e)    Plot both the variables you calculated together in the same graph (years on the horizontal axis, nominal and real exchange rates on the vertical axes).                                                 (10 marks)
(f)    Answer the following questions, next to the graph or at the top of the spread-sheet: (i) According to your calculations which countries’ exchange rates are usually over-valued? Under-valued? Correspond to the theory of Purchasing Power Parity (PPP)?                             (10 marks)
(ii) What explains the difference between the nominal and real exchange rates, i.e. what is happening to relative prices?                     (10 marks)