Problem 2.
1 Albert’s Trip to Canada
Albert visits Toronto and buys 1.74 Canadian dollars (CAD) for one British
pound (GBP). When he returns home to the United Kingdom, he converts
CAD1 into GBP0.59. Is the new exchange rate favorable or unfavorable?
Assumptions Values
Buy Canadian dollars for (CAD/£) 1.7400
Which is equivalent, the reciprocal (£/CAD) £0.5747
Buy back pounds for (£/CAD) £0.5900
Which is equivalent, the reciprocal (CAD/£) 1.6949
It is better to convert back his remaining Canadian dollars to GBP when he
reaches back home.
Problem 2.4 Brent Oil
In 2015, one barrel of Brent oil traded for GBP42.5 and South Africa rands (ZAR) 790. What is
the exchange rate between the pound and the rand? How would the exchange rate change if the oil
price jumps to GBP50 per barrel (assuming no change in the price in South Africa)?
Brent Oil
Assumptions Values What If
Price of an ounce of gold in GBP (£/barrel) £42.50 £50.00
Price of an ounce of gold in S. African rands (ZAR/barrel) ZAR 790.00 ZAR 790.00
What is the implied ₤/ZAR exchange rate? £0.0538 £0.0633
(GBP price of an ounce / ZAR price of an ounce)
Problem 2.6 Online Shopping
Tamara lives in Egypt and has placed a bundle of items in her Amazon.co.uk account
basket. She has the choice to pay in Egyptian pounds (EGP 1, 844) or in GBP
(151.17). What is the exchange rate between both currencies? In which currency
should she pay?
Assumptions Values
Egyptian pound price of basket (EGP) 1,844.00
British pound price of basket (GBP) 151.17
Implied exchange rate (EGP/£) 12.1982
Many emerging markets that suffer from foreign exchange shortages have more than
one exchange rate . The official exchange rate is the one officially transacted by the
banking system. However, there is usually a parallel foreign exchange market where
the foreign currency is usually cheaper. Tamara should weigh both of these rates
before making her decision.
Australia's Current Account
Use the following balance of payments data for Australia from the IMF to answer Problems 3.1–3.4.
3.1 What is Australia's balance on goods?
3.2 What is Australia's balance on services?
3.3 What is Australia's balance on goods and services?
3.4 What is Australia's current account balance?
Assumptions (millions of US d 2000 2001 2002
Goods: exports 64,052 63,676 65,099
Goods: imports -68,865 -61,890 -70,530
Balance on goods -4,813 1,786 -5,431
Services: credit 18,677 16,689 17,906
Services: debit -18,388 -16,948 -18,107
Balance on services 289 -259 -201
Income: credit 8,984 8,063 8,194
Income: debit -19,516 -18,332 -19,884
Balance on income -10,532 -10,269 -11,690
Current transfers: credit 2,622 2,242 2,310
Current transfers: debit -2,669 -2,221 -2,373
Balance on current transfers -47 21 -63
Questions 2000 2001 2002
3.1 What is Australia's balanc -4,813 1,786 -5,431
(goods exports - goods imports)
3.2 What is Australia's balance 289 -259 -201
(services credit - services debit)
3.3 What is Australia's balance -4,524 1,527 -5,632
(balance on goods + balance on services)
3.4 What is Australia's current -15,103 -8,721 -17,385
(the sum of the four balances listed above,
goods, services, income, and current transfers)
2003 2004 2005 2006
70,577 87,207 107,011 124,913
-85,946 -105,238 -120,383 -134,509
-15,369 -18,031 -13,372 -9,596
21,205 26,362 31,047 33,088
-21,638 -27,040 -30,505 -32,219
-433 -678 542 869
9,457 13,969 16,445 21,748
-24,245 -35,057 -44,166 -54,131
-14,788 -21,088 -27,722 -32,383
2,767 3,145 3,333 3,698
-2,851 -3,414 -3,813 -4,092
-84 -269 -480 -394
2003 2004 2005 2006
-15,369 -18,031 -13,372 -9,596
-433 -678 542 869
-15,802 -18,709 -12,830 -8,727
-30,674 -40,066 -41,032 -41,504
2007 2008 2009 2010
142,421 189,057 154,777 213,782
-160,205 -193,972 -159,216 -196,303
-17,784 -4,915 -4,439 17,479
40,496 45,240 40,814 46,968
-39,908 -48,338 -42,165 -51,313
588 -3,098 -1,351 -4,345
32,655 37,320 27,402 35,711
-73,202 -76,719 -65,809 -84,646
-40,547 -39,399 -38,407 -48,935
4,402 4,431 4,997 5,813
-4,690 -4,805 -5,799 -7,189
-288 -374 -802 -1,376
2007 2008 2009 2010
-17,784 -4,915 -4,439 17,479
588 -3,098 -1,351 -4,345
-17,196 -8,013 -5,790 13,134
-58,031 -47,786 -44,999 -37,177
2011 2012 2013
271,719 257,950 254,164
-249,238 -270,136 -249,774
22,481 -12,186 4,390
51,653 53,034 53,344
-61,897 -65,405 -67,399
-10,244 -12,371 -14,055
47,852 47,168 45,910
-102,400 -88,255 -83,618
-54,548 -41,087 -37,708
7,510 7,271 7,206
-9,723 9,635 9,390
-2,213 16,906 16,596
2011 2012 2013
22,481 -12,186 4,390
-10,244 -12,371 -14,055
12,237 -24,557 -9,665
-44,524 -48,738 -30,777
