Question

Suppose that half of U.S. foreign assets are denominated in euros, while all of American liabilities to foreigners are denominated in dollars. Suppose that at the beginning of the year, U.S. foreign assets were valued at 100% of U.S. GDP, while American liabilities to foreigners were valued at 150% of GDP. By how much and in what direction would a 10% depreciation of the dollar relative to the euro affect the U.S. net international investment position?

Suppose that at the beginning of 2019, American holding of foreign assets consists of 100 shares of European corporate stock, with each share having a value of 1 euro. Moreover, suppose that the rest of the world holds $400 of U.S. government bonds. Finally, the exchange rate at the beginning of the year is $1.5 per euro. What was the American net international investment position at the beginning of 2019?

Answer 1

To understand clearly,let take numerical value,

1€=2 $

Let take gdp=100€/200$

U.S. foreign assest=100% of the gdp=100€/200$

U.S liabilities=150% of the gdp =150€/300$

U.S net international investment =200$-300$=-100$

After 10% depreciation of US dollar to euro,

1€=2.2$

U.S gdp=100€/220$

U.S assest=100€/220$

U.S liabilities=150€/330$

U.S net international investment=220-330=-110

So net international investment decreases by 10$.

Or in other words,10% depreciation of Dollar leads 10% decrease in net international investment.

Net international investment=US financial investment to foreign - foreign financial investment in US

American foreign assest=100€ or 100*1.5=150$

Foreigners US assest holding=400$

At beginning of 2019,US net international or foreign investment=150-400=250$