Exercise 1 (10 points)
[5 pts] Pick a trade that happens in one of your personal relationships, so with your partner, parents, siblings, or close friends. A trade is any exchange of physical goods or of useful services. Describe that trade and describe the related comparative advantages had by the two people involved (you and the other person).
Think of dynamic specialization and dynamic comparative advantage. Read the lecture slides on the topic carefully.
[2 pts] Discuss one traits/skills you believe you possess that fit the notion of a dynamic comparative advantage. Include a discussion of the trading situation in which those skills are a comparative advantage.
[3 pts] Discuss one traits/skills you believe you possess that fit the notion of a static comparative advantage. Again, include a discussion of the relevant trading situation.
Exercise 2 (15 points)
Consider the trade in Bitcoins.
[10 pts] Name a Bitcoin trading platform and give a link to the website. Then detail: i) what transaction costs you think are involved in exchanging 1000 Euros into US dollars, ii) how many bitcoins one would then get if one uses those US dollars to buy a certain number of bitcoins on the mentioned platform, iii) the number of US dollars one then gets when immediately selling the bitcoins just bought, and iv) the number of Euros one can then get for those US dollars. So I want you to find out (on the basis of looking up the costs or asking market participants) what would happen in each of the four steps above (buy USD with Euros, buy bitcoin with US dollars, sell bitcoin for US dollars, sell dollars for Euros). You should thus end with the number of Euros you would have left if you did the four steps above. Give references.
[5 pts] Do you think commodity-backed money will displace fiat money in international trade? Give reasoned arguments for why.
Exercise 3 (15 points)
Consider the issue of mark-to-market value.
Suppose that on January 1st 2022, you entered the following contract: you committed to buying 15 million Euro on November 1st 2022 in exchange for 17 million US dollars. On June 1st 2022 you want to know what the mark-to-market value is of this contract.
[5 pts] describe the additional contract you would have to enter into on June 1st 2022 to close out the mentioned contract of January 1st 2022. Be as precise as you can be.
[10 pts] What would the prices of the relevant forward exchange have to be for the mark-to-market value of the contract entered on January 1st to be +200,000 US dollars? Show your derivation.
Exercise 4 (10 points)
Consider the following quotes.
EUR/USD = 0.8784
EUR/GBP = 1.4654
USD/GBP = 1.6724
[5 pts] Is there an arbitrage opportunity? Describe a sequence of buys and sales that would effectuate this opportunity.
[5 pts] Describe a sequence of buys and sales that would lead to a profit of 100,000 US dollars.
Exercise 5 (10 points)
Consider the issue of optimal investments.
Suppose you know of one asset that, every year, offers 5% return with 90% probability, delivering -10% return with 10% probability. Each year one can either sell or turn over (= not sell) the asset for another year. The returns in different years are independent (=unrelated, idiosyncratic).
A different asset offer 3% return with 99% probability and -20% return with 1% probability. That asset can also be turned over and its returns are also independent over time.
[5 pts] If you define “risk” as the probability that your investment makes a loss greater than 5%, what asset is riskier after two years? What is [roughly] the expected return of the two assets after two years?
[5 pts] What asset is riskier after 30 years? What is [roughly] the expected return per year of the two assets after 30 years?
[10 pts BONUS} After how many years are the risks (as defined above) the same for the two assets? Show how you calculated this.
Exercise 6 (10 points)
Consider the Solow model with as defined in the slides.
[5 pts] If TFP increases by 6% whilst both K and L decrease by 4.5%, how much does Y change by? If the share of Labour in output has increased in equilibrium, what do you know must have happened to 𝛼?
[5 pts] Consider an equilibrium path (=steady state path) in which TFP growth per year is 1% whilst population growth is 2% per year. Is it then true (or not) that capital per labour decreases over time? Is it true or not that capital-per-labour grows more quickly if the share of capital in output is higher?
3 Exercise 7 (30 points)
Pick a company or work organization you know well, either because you work there or you know someone well who works there. (The chosen company is Sabic)
Consider the types of capital explained in the growth slides. (Physical capital, Human capital, Natural capital, Entrepreneurial capital: links, Institutional capital, Social capital)
[18 pts] Give an example of each of the six types of capital mentioned in the slides in that organization, including a quick description of its relevance for the output of the organization.
Consider next the issue of limited liability
[6 pts] Give an example of the importance of limited liability in that organization: describe a situation in which limited liability clearly applied.
Consider next the issue of embodied knowledge
[6 pts] Give an example of embodied in that work organization. Describe how that embodied knowledge limits the degree to which management can control the situation.
Exercise 8 (10 points, BONUS)
[5 pts] Discuss the relevance of the Dutch disease problem for your organization (or an organization you know well).
[5 pts] Name the two international financial institutions you think are the most relevant for the financial markets in Saudi Arabia, and motivate why you think they are so relevant.
