Money and Finance

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 (ExchangeRate). 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. 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).

(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)