GE Chapter 06 solutions_fmt

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1、Chapter6

2、AggregateIncomes67Chapter6AggregateIncomesQuestions1.SupposeyouarecomparingincomepercapitaintheUnitedStatesandGhana.YoufirstconvertthevaluesintoU.S.dollarsusingthecurrentexchangeratebetweentheU.S.dollarandtheGhanaiancedi.YoualsoconvertbothvaluestoU.S.dollarsusingthepurchasingpowerparity-adj

3、ustedexchangerate.Whichmeasureislikelytogiveyouamoreaccuratepictureofthelivingstandardsinbothcountries?Explainyouranswer.Answer:ThenominalexchangerateconvertsGhanaiancediintoU.S.dollarsbutdoesnottakeintoaccountdifferencesinpricesandconsumptionpatterns.Also,thenominalexchangeratecanfluctuateforreason

4、sthatarenotrelatedtotherelativepricelevelsineithercountry.Thepurchasingpowerparity-adjustedexchangerate,however,isestimatedbycalculatinghowmucharepresentativebundleofcommoditiescostsinvariouscountries.So,thepurchasingpowerparity-adjustedexchangeratewillshowhowmuchitwillcostresidentsoftheUnitedStates

5、andGhanatopurchasethesamebundleofgoods.Thismeansthatthepurchasingpowerparity-adjustedexchangerateislikelytobeamoreaccuratemeasureoflivingstandardsintheUnitedStatesandGhana.A-head:INEQUALITYAROUNDTHEWORLDConcept:Purchasingpowerparity2.WhatarethedisadvantagesofusingBigMacstomeasurepurchasingpowerparit

6、y?Answer:ThepriceofaBigMacisusedasanalternativemeasureoftheexchangeratebetweentwocountries.OneoftheproblemswithusingBigMacstomeasurepurchasingpowerparityisthat,insteadofabundleofdiversegoods,thisindexsimplycomparesabundleconsistingofjustonegood.Also,BigMacsareonlyaverysmallfractionofpeople’sconsumpt

7、ion,sotheirpriceswillnotreflecttruecost-of-livingdifferencesacrosscountries.A-head:INEQUALITYAROUNDTHEWORLDConcept:TheBigMacindex,purchasingpowerparity3.SupposethatcountryAhashigherincomepercapitathancountryB.ExplainwhythisdoesnotimplythatmostcitizensofcountryAhavehigherincomethanmostcitizensofcount

8、ryB.Trytoconstructanexampleinwhichbothcountrieshave10citizenstodemonstratethispoint.Answer:Althoughincomepercapitadoescorrelatestronglywithvariousmeasuresofthequalityoflife,itdoesnotgiveacompletepictu