08 808 european union euro euro 082 australia

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Unformatted text preview: uropean Union euro euro 0.82 Australia Australia dollar dollar 1.33 1.33 Sweden Sweden krona krona 7.88 7.88 India India rupee rupee 45.04 45.04 Mexico Mexico peso peso 10.83 Japan Japan yen 115.54 115.54 Great Britain Britain pound pound Country/ Country/ region 0.56 0.56 If you travel outside the United States or invest in foreign businesses, you will want to know the exchange rate for your U.S. currency. The values for the dollar are for selected currencies on October 28, 2005. On that day, it took 10.83 Mexican pesos to buy one U.S. dollar. The rate is probably different today because the exchange rates are constantly changing. simply divide $1 by the number of euros it takes to obtain that one dollar. Here is the arithmetic: $1/0.80 $1.25. In other words €1 $1.25. We are saying, then, that (a) $1 €0.80 and (b) €1 $1.25 are exactly the same thing. If your objective is to find out how much of your money you have to pay to buy a foreign good, you need to follow three simple steps: 1. Find the current exchange rate. (Exchange rates are often quoted in the daily newspaper and online.) 2. Figure out how much of your money it takes to buy 1 unit of the foreign money. 3. Multiply the number of units in the price of the foreign good by your answer to #2. unit of the foreign money. In other words, we need to know how many dollars and cents it takes to buy 1 euro. We can figure this out from the exchange rate identified in #1. We currently know that $1 buys €0.80, but we don’t know how many dollars and cents it takes to buy 1 euro. To find out, we simply divide $1 by the number of euros it takes to buy $1: $1/0.80 $1.25. In other words, it takes $1.25 to buy 1 euro. 3. We now multiply the number of units in the price of the foreign good (100) times our answer in #2 ($1.25), and we get $125. Consider another problem. Suppose someone from Italy comes to the United States and wants to buy an American good priced at $200. If the exchange rate is $1 €0.80, how may euros does the person have to give up to buy a $200 item? Let’s calculate things from the perspective of the Italian. In other words, we will put ourselves in the shoes of the Italian. 1. We know the exchange rate is $1 €0.80. 2. We know how much it takes of our currency (our currency” this time is the euro because we are the Italian) to buy $1. It takes €0.80. 3. We multiply the number of units in the price of the American good (200) times our answer in #2 (€0.80). This gives us €160. Note : These calculations are not hard, it’s just that you are unaccustomed to making them. Going between currencies is a little like translating from one language into another. First you have to listen to the foreign language, understand what is being said, and then find the words in your native language that correspond to the foreign words. Just as it takes some time to learn how to translate a language, it takes some time to learn how to go from one currency to another. Go over the examples a few more times to get the hang of it. Let’s rework the previous example, showing each step. Appreciation and Depreciation 1. We identified the current exchange rate as $1 €0.80. 2. We need to identify how much of our money (U.S. money) it takes to buy 1 Suppose that on Tuesday the exchange rate between euros and dollars is $1 for €0.80. By Saturday, the exchange rate has changed to $1 for €0.70. On Saturday, then, 416 Chapter 15 International Trade and Economic Development 15 (390-427) EMC Chap 15 11/18/05 9:13 AM Page 417 Can Big Macs Predict Exchange Rates? ??? I n an earlier chapter, we explained why goods that can be easily transported from one location to another usually sell for the same price in all locations. For example, if a candy bar can be moved from Atlanta to Wichita, then we would expect the candy bar to sell for the same price in both locations. Why? Because if the candy bar is priced higher in Wichita than Atlanta, people will move candy bars from Atlanta (where the price is relatively low) to Wichita to fetch the higher price. In other words, the supply of candy bars will rise in Wichita and fall in Atlanta. These changes in supply in the two locations affect the price of the candy bars in the two locations. In Wichita the price will fall and in Atlanta the price will rise. This price movement will stop when the price of a candy bar is the same in the two locations. Now consider a good that is sold all over the world, McDonald’s Big Mac. Suppose the exchange rate between the dollar and the yen is $1 = ¥100 and the price of a Big Mac in New York City is $3 and ¥400 in Tokyo. Given the exchange rate, is a Big Mac selling for the same price in the two cities? The answer is no. In New York, it is $3, but in Tokyo it is $4 (the price in Tokyo is ¥400 and $1 = ¥100). Stated differently, in New York $1 buys one-third of a Big Mac, but in Tokyo $1 buys only one-fourth of a Big Mac. Will Big Macs be shipped from New York to Tokyo to fetch the...
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This document was uploaded on 01/16/2014.

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