Suppose Venus xS, the latest countries: Singapore, Oman, United States (U.S.). S

Question

Suppose Venus xS, the latest countries: Singapore, Oman, United States (U.S.). South smartphone to be released on 1st January 2017 is produced in onlyS Africa, and Azerbaijan. The prices of Venus x5 in the five theSingapore, Ohone to be released on 1st January 2017 is produced in only 5 are shown in Table 1 r Parity (PPP) Theory to predict the exchange rate between U.s. and the other exchange rate. Entealculate the difference between PPP predicted exchange rate and the actual a. Use the Purchasing Power four countries. Also, calculate the p = P exchange rate. Enter your answers in the spaces p rovided in Table 1. I 18 points) Table 1 Predicted Rate Actual Exchange Rate Difference between Predicted and Actual Venus X5 Price (in country currency) Country (in country cury change U.S Oman Singapore South Afica Azerbaijan 649 200 rial 048 ringg 11,799 rand 500 manaf 5988 0.2311 0.0718 0.9555 ? Which countries have 1b. Base on your answe an under valued currency? [10 points! an rs in part 1a, which countries have an Page 4 of 10

Explanation / Answer

1.c)

Suppose at equilibrium 1$=60 Indian Rupees. Now if it is overvalued,it means that it becomes 1$=40 Rupees or any other number less than 60.

The advantages are

·         It provides a downward pressure on inflation as imported goods become less costly

·         More imports can be bought mainly this helps the developing countries to import the technologies and the technically equipped modern machineries which they cant produce on their own

·         High value of currency forces domestic producers to improve their efficiency to be more competitive in the international market.

The disadvantages are

·         Overvalued currency will make exports less competitive in the international market which will hurt the export industries

·         Imports are relatively cheaper to buy due to overvalued currency. Consumers will go in for more imports which will damage to domestic industries. This will also increase trade deficit.

1 a and b)

Predicted rate

(649dollar/the price in each country)

Difference

Predicted-Actual

When predicted>actual ,then overvalued and when predicted <actual , then undervalued.

1.d)In case of undervalued currency, the advantages are

The disadvantages are

Country Venus X5 Price

Predicted rate

(649dollar/the price in each country)

Actual

Difference

Predicted-Actual

overvalued/undervalued US 649 dollar 1 1 0 - Oman 200rial 3.245 2.59 0.655 overvalued Singapore 8048ringgit 0.0806 0.23 -0.1494 undervalued South Africa 11799manat 0.055 0.0718 -0.0168 undervalued Azerbaijan 500 1.298 0.955 0.343 overvalued

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