The relative prices of goods at home and abroad affect how much the U.S. exports

Question

The relative prices of goods at home and abroad affect how much the U.S. exports and imports. We can use relative prices of goods at home and abroad to compute the exchange rate.

The following question focuses on the exchange rate for U.S. dollars and Kenyan shillings. The exchange rate is defined as Kenyan shillings per U.S. dollar.

The table below shows the prices of two goods. Suppose wheat is produced in the U.S. and coffee beans are produced in Kenya.

   kenya coffee beans U.S. Wheat

   (150 per kilogram) ($3.00 per kilogram)
Exchange rate Price in Kenya Price in U.S. Price in Kenya Price in U.S

$1=75 shilling 150 shilling $2.00 --------- $3.00

$1=60 shilling 150 shilling ----------- 180 shilling $3.00

True or False: When the exchange rate falls from 75 Kenyan shillings to 60 Kenyan shillings per U.S. dollar, U.S. net exports will rise.

Explanation / Answer

The first answer is 225 shiling from 3*75 the 2nd answer is $2.50 from 150/60 Last answer is False, net exports will fall Hope this helps

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