1. Go to the website for the University of Pennsylvania World Tables 7.1:
(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 (ExchangeRate). Choose the option “add
column so choose text to columns in the Data toolbar. Choosecommas 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
exchangerates 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).
(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?