Assume that the spot exchange rate between U.S. Dollar and Chinese Yuan is $1 = 6.90...

Assume that the spot exchange rate between U.S. Dollar and Chinese Yuan is $1 = 6.90 yuans

Compute the direct exchange rate between U.S. $ and Chinese yuan (i.e., value of 1 yuan in $). b)At this exchange rate, how much would a HP laptop which costs $725 in Houston cost in Beijing? (Ignore the costs of shipping and handling and any tariff) c,Assume that on pressure from the Trump administration, China agrees to let yuan appreciate by 15%. What is the new exchange rate (direct) after the appreciation? d,At this exchange rate, how much would the HP laptop in #2 above cost in Beijing? e.Assume that a pair of sneaker costs 300 yuans in Beijing. How much would it cost in U.S. $ before the appreciation of yuan? f.How much would the pair of sneaker cost in U.S. $ after the appreciation of Yuan? g.What is likely to happen to U.S. exports to China when Yuan appreciates? Why? h. What is likely to happen to U.S. imports from China when Yuan appreciates? Why

Solutions

Expert Solution

(a)

Direct exchange quote is 1Yuan = $0.1449

Working : 1/6.9 = 0.1449275

(b)

A HP laptop worth $725 would cost ¥5,002.5

Working : $725 x (1/0.1449275) = ¥5,002.5

(c)

Exchange rate after appreciation is 1Yuan = $0.1667

Working : $0.1449275 x (1+15%) = $0.1667

(d)

After appreciation, the HP laptop would cost ¥4,350

Workings : $725 x (1/0.666667) = ¥4,350

(e)

A pair of sneaker costing ¥300 would cost $43.4783 before appreciation

Working : ¥300/$6.9 = $43.478261

(f)

A pair of sneakers costing ¥300 would cost $50 after appreciation

Working : ¥300 x $0.166667 = $50

(g)

When Yuan appreciates against dollar, the US exports to China will increase. This is because for the goods exported the price will be relatively lower as we can see in the above case of HP laptop. It has reduced from ¥5,002 to ¥4,350

(h)

The imports from China to US will be reduced as the price for goods will be increased in the US market as we can see from the above answers, the price of sneakers has increased from $43.4782 to $50.

ekkarill92 answered 1 year ago

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