# Calculating Real Exchange Rate Index Some examples of calculating the real exchange rate index in a two-country economy. ```r gemTwoCountry_RealExchangeRateIndex_7_4(...) ``` ## Arguments - `...`: arguments to be passed to the function sdm2. ## Returns A real exchange rate index. ## Examples ```r # es.DFProd is the substitution elasticity between domestic and foreign products. makeDstl <- function(es.DFProd = 0.5, alpha.firm.CHN = 1, beta.household.CHN = c(0.75, 0.25), outbound.investment.rate = 0.25) { es.CL <- 0.8 # substitution elasticity between capital and labor dst.firm.CHN <- node_new("output", type = "SCES", alpha = alpha.firm.CHN, beta = c(0.75, 0.25), es = es.CL, "lab.CHN", "cap.CHN" ) dst.household.CHN <- node_new("util", type = "FIN", rate = c(1, outbound.investment.rate), "cc1", "bond.ROW" ) # 0.1 is the amount of foreign investment corresponding to # each unit of cc1 (i.e. composite commodity 1). node_set(dst.household.CHN, "cc1", type = "SCES", alpha = 1, beta = beta.household.CHN, es = es.DFProd, "prod.CHN", "prod.ROW" ) node_plot(dst.household.CHN) dst.firm.ROW <- node_new("output", type = "SCES", alpha = 1, beta = c(0.5, 0.5), es = es.CL, "lab.ROW", "cap.ROW" ) dst.household.ROW <- node_new("util", type = "SCES", alpha = 1, beta = c(0.05, 0.95), es = es.DFProd, "prod.CHN", "prod.ROW" ) list(dst.firm.CHN, dst.household.CHN, dst.firm.ROW, dst.household.ROW) } dstl <- makeDstl() SExg <- { tmp <- matrix(NA, 7, 4, TRUE) tmp[2, 2] <- 30 # the supply of lab.CHN tmp[3, 2] <- 10 # the supply of cap.CHN tmp[5, 4] <- 156 # the supply of lab.ROW tmp[6, 4] <- 156 # the supply of cap.ROW tmp[7, 4] <- 8 # the supply of bond.ROW tmp } f <- function(A = dstl, S0Exg = SExg) { sdm2( A = A, names.commodity = c( "prod.CHN", "lab.CHN", "cap.CHN", "prod.ROW", "lab.ROW", "cap.ROW", "bond.ROW" ), names.agent = c( "firm.CHN", "household.CHN", "firm.ROW", "household.ROW" ), B = { tmp <- matrix(0, 7, 4, TRUE) tmp[1, 1] <- tmp[4, 3] <- 1 tmp }, S0Exg = S0Exg, numeraire = "lab.CHN" ) } ge.benchmark <- f() ## real exchange rate index reri <- function(ge.new, ge.benchmark) { weight.CHN <- rowSums(ge.benchmark$SV)[c("prod.CHN", "lab.CHN", "cap.CHN")] weight.ROW <- rowSums(ge.benchmark$SV)[c("prod.ROW", "lab.ROW", "cap.ROW")] weighted.mean(ge.new$p[c("prod.ROW", "lab.ROW", "cap.ROW")], weight.ROW) / weighted.mean(ge.new$p[c("prod.CHN", "lab.CHN", "cap.CHN")], weight.CHN) } ## technology progress in CHN reri(f(A = makeDstl(es.DFProd = 5, alpha.firm.CHN = 2)), ge.benchmark) reri(f(A = makeDstl(es.DFProd = 0.5, alpha.firm.CHN = 2)), ge.benchmark) ## labor supply change in CHN SExg.LSC <- SExg SExg.LSC[2, 2] <- SExg.LSC[2, 2] * 2 reri(f(A = makeDstl(es.DFProd = 5), S0Exg = SExg.LSC), ge.benchmark) reri(f(S0Exg = SExg.LSC), ge.benchmark) ## capital accumulation in CHN SExg.CA <- SExg SExg.CA[3, 2] <- SExg.CA[3, 2] * 3 reri(f(A = makeDstl(es.DFProd = 5), S0Exg = SExg.CA), ge.benchmark) reri(f(S0Exg = SExg.CA), ge.benchmark) ## preference change in China reri(f(A = makeDstl(es.DFProd = 5, beta.household.CHN = c(0.5, 0.5))), ge.benchmark) reri(f(A = makeDstl(beta.household.CHN = c(0.5, 0.5))), ge.benchmark) ## outbound-investment-rate change in China reri(f(A = makeDstl(es.DFProd = 5, outbound.investment.rate = 0.1)), ge.benchmark) reri(f(A = makeDstl(outbound.investment.rate = 0.1)), ge.benchmark) ``` ## See Also gemTwoCountry_Bond_7_4

gemTwoCountry_RealExchangeRateIndex_7_4 function