Question

Assume that the export price of a Toyota Corolla from Osaka, Japan, is ¥2,100,000. The exchange rate is ¥87.59 /$.

The forecast rate of inflation in the United States is 2.1 % per year and in Japan it is 0.0 % per year. Use this data to answer the following questions on exchange rate pass-through.

a. What was the export price for the Corolla at the beginning of the year expressed in U.S. dollars?

b. Assuming purchasing power parity holds, what should be the exchange rate at the end of the year?

c. Assuming 100% exchange rate pass-through, what will be the dollar price of a Corolla at the end of the year?

d. Assuming 75% exchange rate pass-through, what will be the dollar price of a Corolla at the end of the year?

a. What was the export price for the Corolla at the beginning of the year expressed in U.S. dollars?

The export price for the Corolla at the beginning of the year expressed in U.S. dollars is

$__.

(Round to the nearest cent.)

b. Assuming purchasing power parity holds, what should be the exchange rate at the end of the year?

Assuming purchasing power parity holds, the exchange rate be at the end of the year should be

yen¥__ /$.

(Round to two decimal places.)

c. Assuming 100% exchange rate pass-through, what will be the dollar price of a Corolla at the end of the year?

Assuming 100% exchange rate pass-through, the dollar price of a Corolla at the end of the year will be

$__.

(Round to the nearest cent.)

d. Assuming 75% exchange rate pass-through, what will be the dollar price of a Corolla at the end of the year?

Assuming 75% exchange rate pass-through, the dollar price of a Corolla at the end of the year will be

$__.

(Round to the nearest cent.)

Answer 1

a.
Export price at the beginning of the year in U.S. dollars = Export price in Yen/Spot exchange rate
Export price at the beginning of the year in U.S. dollars = 2,100,000/87.59
Export price at the beginning of the year in U.S. dollars					$23,975.34
The export price for the Corolla at the beginning of the year expressed in U.S. dollars is $23,975.34
b
Exchange rate at end of the year = Initial spot rate*(1+Inflation rate in Japan)/(1+Inflation rate in U.S)
Exchange rate at end of the year = 87.59*(1+0)/(1+0.021)
Exchange rate at end of the year = 87.59*1/1.021
Exchange rate at end of the year = 87.59*1/1.021
Exchange rate at end of the year = 85.79
Assuming purchasing power parity holds, the exchange rate be at the end of the year should be								yen¥ 85.79/$
c
Price of corolla at beginning of year			2100000	Yen
Inflation rate in Japan			0.00%
Expected spot rate of corolla one year from now			2100000	Yen
Expected spot exchange rate one year from now			85.79
Price of corolla at end of year is $			$24,478.82
Assuming 100% exchange rate pass-through, the dollar price of a Corolla at the end of the year will be $24,478.82
d
Expected spot rate of corolla one year from now			2100000	Yen
Expected change in spot rate in percent			2.10%
Proportion of exchange rate change passed through by Toyota			75%
Proportional percent change			1.575%
Effective exchange rate of Yen/$			86.232
Price of corolla at end of year			$24,352.95
Assuming 75% exchange rate pass-through, the dollar price of a Corolla at the end of the year will be $24,352.95