Homework SoursefileCUsersAHandleyAppDataLocalTempmsohtmlclip101clipimage002
file:///C:/Users/AHandley/AppData/Local/Temp/msohtmlclip1/01/clip_image002.png
Chapter 15, Technical Question 1:
1. Show the effect of dollar appreciation and depreciation
with the yen on the price of U.S. exports
and imports by updating Table 15.2, as shown in
the updated table.
Solution
Exchange rate in international trade is observed between currencies of two countries. At this exchange rate commodities are traded between them. Here two currencies are dollar and Yen. This exchange rate will affect import, export of USA and Japan.
Exchange rate is subject to fluctuation. If more dollar is payable to get one Yen then dollar value is depreciated ad Yen has appreciated. In opposite situation dollar will appreciate. Suppose initially one dollar was equal to 110 Yen. Thus one unit of Yen is available at 1/110 dollar. Now exchange rate is 117 Yen per dollar. So 7 yen extra is now available by paying one dollar. It will mea appreciation in dollar and depreciation in Yen.
When dollar appreciate in value, more yen is now payable to get one dollar equivalent commodities from USA. Thus import of commodities are more costly. It will reduce the import of commodities by Japan from USA. Just opposite will happen for importing goods from Japan. Previously US importers are getting commodities of 110 Yen by paying one dollar. Now they are getting commodities of extra 7 yen by paying the same dollar. So import from Japan is now comparatively cheap. It will increase volume of import by USA from Japan.
Combining the two effect, in USA import from Japan will increase and export to Japan will decrease. Thus balance of trade with Japan will be adverse. Just opposite will happen in Japan. They will export more to USA and will import less from USA. Thus the balance of trade with USA in Japan is favorable.
Now consider the opposite situation when dollar value has appreciated and Yen has depreciated. Then export of commodities by USA to Japan will rise and import from Japan will fall. So balace of trade with Japan will tend to become favorable.
