Question

6 24 2 8. Then use the following information to show the impact of a change in exchange rate on the trade balance Suppose that there are two goods sold in China and in the U.S When the exchange rate is 1USD = 6 yuan a car cost $50,000 in US and 0,000 yuan in China and the price of a shirt is $20 in U.S and 120 yuan in China. US imports the shirt and exports the cars 30 Now assume that the exchange rate is 1 yuan .15 USD 1. Which currency has appreciated? Why? Use a graph to illustrate your answer. 2. Calculate the $ price of the shirt. 3. Calculate the yuan price of the car. 4. As the result of the currency movement what will happen to US export of the car and U.S import of the shirt. 5. Explain how a depreciation of the USD will likely affect the U.S trade deficit and the economic growth of U.S

Answer 1

1) Before the change in exchange rate 6 yuan were worth a dollar. After the change, the number of yuan required to buy a dollar went up to 100/15 or 6.66. Hence more yuan is now needed to buy a dollar so that yuan has depreciated and dollar has relatively appreciated

This might be possible because the demand for yuan has fallen which has shifted its demand function to the left lowering its exchange rate value and the quantity traded.

2) Price of shirt was 120 yuan in China so after trade price in the US becomes 120*0.15 = $18 per shirt

3) Price of car was $50000 in US so after trade price in China becomes $50000/0.15 = 333,333.33 yuan

4) As you have seen US imports are now cheaper so US will import more goods from China. Chinese imports have become expensive so China will import less. This implies US will be able to export less and so US experiences a fall in net exports

5) A curreny depreciation will increase trade surplus and so net exports will increase. AD will shift to the right and there will be a short run economic growth based on exports. The growth is not sustainable has exchange rate will return to its long run value and will appreciate in future.