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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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