Question

1. MXN is the symbol for the Mexican Peso. MXN/USD .05. A 2020 Toyota Supra costs $49,000 in the U.S. and 1,200,000 Mexican Pesos in Mexico. Based on this information, please answer the following questions.

1. What is USD/MXP in real currency exchange rate terms?
2. Is the USD over or undervalued?
3. Where am I better off buying the Toyota Supra? In Mexico or in the U.S.?
4. Based on the official/nominal MXN/USD currency exchange rate, what would I expect to pay for the Supra in Mexico?
5. Based on the real cost of the same car in both countries, if Purchasing Power Parity (PPP) were to hold true, what would USD/MXN be?
6. Based on the nominal currency exchange rate, if Purchasing Power Parity (PPP) were to hold true, what would I expect to pay for the Supra in the U.S.?

2) Lizzy owns a costume jewelry store in South Africa. She imports most of her jewelry from Zambia. She reads in the newspaper that Zambia is expected to lower interest rates. Is she better off waiting until Zambia actually lowers interest rates before she imports more jewelry from Zambia or should she import more jewelry now, before interest rates decline in Zambia? Explain your answer.

Answer 1

Nominal exchange rate=

Given,MXP/USD= 0.05

so, 1 Mexican Peso = 1 US $ *0.05

ie. 1 MXP=0.05 US $

So,USD/MXP=1/0.05= 20

a. USD/MXP in real currency exchange rate terms

1200000 MXP/49000 USD=

24.49

MXPs per USD

b.So, USD is overvalued as more MXPs(24.49 as against the 20 above) are required to purchase 1 USD

c. Where am I better off buying the Toyota Supra? In Mexico or in the U.S.?

Better to buy in Mexico, as the overvalued USD will buy more in Mexico.

d.980000 MXPs

e.Based on the real cost of the same car in both countries, if Purchasing Power Parity (PPP) were to hold true,

USD/MXN will be

1/24.49=

0.04083

f.Based on the nominal currency exchange rate, if Purchasing Power Parity (PPP) were to hold true, what would I expect to pay for the Supra in the U.S.?

1200000/20=

60000

USD

2.Lower interest rates lowers the value of the Zambian currency ,ie. Less of South African currencies are required to import goods from Zambia.

So, Lizzy will be better off waiting until Zambia actually lowers interest rates before she imports more jewelry from Zambia