ECON3520 Problem Set
(Total 100 Marks)
Deadline: 4 p.m. on Friday, 24 October. Submit through the Blackboard.
• Type your answers where possible. Handwritten answers are not acceptable.
• Use official data from the Australian Bureau of Statistics (ABS), Reserve Bank of Australia (RBA),
and the U.S. Bureau of Labor Statistics (via FRED).
• Provide clear graphs and economic interpretations for each question.
• Report any calculations and plots neatly.
Part 1. Current Account Movements in Australia
Data links and variable construction.
• ABS Balance of Payments: Data Link
– Current Account Balance – Series ID: A3533808F
– Trade Balance (Goods and Services) – Series ID: A3533958L
– Primary Income Balance – Series ID: A3533978W
• ABS National Accounts: Data Link
– GDP (nominal: Gross domestic product: Current prices: Original): Series ID: A2302467A
– Terms of Trade (Index; Original) – Series ID: A2302478J
• ABS National Capital Account: Data Link
– Investment (All sectors; Gross fixed capital formation) – Series ID: A2302557F
• ABS National Income Account: Data Link
– National Saving (All sectors ; Net saving) – Series ID: A2302470R
• Variable construction:
– Current account as % of GDP = (Current account balance / Nominal GDP)*100.
– Investment as % of GDP = (Investment / Nominal GDP)*100.
– Saving as % of GDP = (National saving / Nominal GDP)*100.
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Question 1. Current Account Balance over Time
Plot Australia’s current account balance as a percentage of GDP for the period 1959--2025 on
quarterly basis. Identify periods when Australia ran:
1. Large deficits
2. Large surpluses
Question 2. Current Account and Saving – Invesment
Recall the national income identity:
CA = S − I
where CA is the current account balance as % of GDP, S is national saving % of GDP, and I is domestic
investment as % of GDP.
1. Compute Australia’s national savings and investment as a percentage of GDP for the period 1959-
-2025 on quarterly basis.
2. Plot S, I, and CA calcuated as CA = S − I. (The current account balance calculated in this
way could be considerably different from the one in Question 1. This is because we are using “net
national saving” here, instead of “gross national saving” which includes depreciations.)
3. Discuss how changes in savings and investment behaviour affect movements in the current account.
Question 3. Terms of Trade and the Current Account
1. Plot Australia’s terms of trade alongside the current account balance for the period 1959--2025 on
quarterly basis.
2. Discuss whether improvements in the terms of trade are associated with stronger current account
outcomes.
2
Purchasing Power Parity (US–Australia)
Data links and variable construction.
• ABS Consumer Price Index, Australia: Data Link
– Consumer Price Index (Index Numbers ; All groups CPI ; Australia) – A128478317T
• U.S. CPI (BLS/FRED): Data Link
– Units: Index 1982-1984=100, Not Seasonally Adjusted
• RBA Exchange Rates: Data Link
– A$1=USD, Series ID: FXRUSD
• Variable construction:
– St: The exchange rate; USD per unit of AUD.
– Absolute PPP-implied rate: SPPPt = PUSt /PAUt .
– Change in prices ∆PUSt = log
(
PUSt
PUSt−1
)
, ∆PAUt = log
(
PAUt
PAUt−1
)
– Change in exchange rate ∆St = log
(
St
St−1
)
Question 1. Absolute PPP
Let the U.S. as the home country, then, (absolute) PPP implies
PUSt = StPAUt
or
SPPPt =
PUSt
PAUt
.
1. Compute the PPP- exchange rate, SPPPt , and plot against the actual exchange rate St from the
RBA data for the period 2017 – 2025 on monlty basis.
2. Briefly discuss why we CANNOT make a comparison between SPPPt and St. (A hint will be
provided in the beginning of Week 10 lecture.)
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Question 2. Relative PPP
From the absolute PPP, we can derive the relative PPP equation:
PUSt = StPAUt
⇐⇒
(
PUSt
PUSt−1
)
=
(
St
St−1
)(
PAUt
PAUt−1
)
⇐⇒ log
(
PUSt
PUSt−1
)
= log
(
St
St−1
)
+ log
(
PAUt
PAUt−1
)
⇐⇒∆PUSt = ∆St + ∆PAUt
Thus, the relative PPP implies
∆SPPP,Relativet = ∆PUSt −∆PAUt
1. Compute ∆SPPP,Relativet and plot against the change of the actual exchange rate, ∆St, from the
RBA data for the period 2017 – 2025 on monlty basis.
2. Plot and report correlations during the period.
3. Briefly discuss whether relative PPP holds in the short run and/or long run.
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