a)Suppose you are a producer of gloves located in Singapore. Rubber is one of th

Question

a)Suppose you are a producer of gloves located in Singapore. Rubber is one of the major inputs for making gloves. Your company must import rubber which is sold in the world market and the priced in U.S dollars. Explain how the profits of your company are affected when the Singapore Dollar appreciates against the U.S dollar.

b)Suppose in March 2010, the spot exchange rate for the euro was 1.52$/euro. In June 2010 that rate was 1.55$/euro.In March, the euro area CPI was 120, and the US CPI was 110. In June, the euro area CPI was 125 and the US CPI was 115. Based on this infomation, answer the following questions. Use two decimal points in all calulations.

i) In norminal terms, did the euro appreciate or depreciate against the dollar?What was the rate of appreciation/depreciation?

ii) Using the information on (i), calculate the real exchange rate for the euro in March and June of 2010.

iii) In real terms, did the euro appreciation or depreciate against the dollar? What was the rate of appreciation/depreciation?

iv) Define the concept of purchasing power parity (PPP), and briefly discuss three reasons why it fails accurately to charaterize exchange-rate movements in reality.

Explanation / Answer

If prices in both countries remain the same, an appreciation will make foreign goods relatively cheaper to you, leading to an increase in imports. It also means that, even if prices remain the same, your goods will be more expensive to foreigners. They will buy less of your goods and exports will fall. As a result, your country's net exports will fall.The exchange rate for the dollar with the euro on June 12, 2008 was e = 0.645

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