Assume the US exports 1,000 computers at a price of $3,000 each and imports 150

Question

Assume the US exports 1,000 computers at a price of $3,000 each and imports 150 UK autos at a price of 10,000 pounds each. Assume that the dollar/pound exchange rate is $2 per pound. (5 points)

a)Calculate in dollar terms, the US export receipts, import payments and trade balance prior to a depreciation of dollar exchange value.

b)Suppose the dollar’s exchange value depreciates by 10%. Assuming that the price elasticity of demand for US exports equals 4 and the price elasticity of demand for US imports equals 2, does the dollar depreciation improve or worsen the US trade balance? Show the change in percentage balance of payment.

c)Now assume that the price elasticity of demand for US exports equals 0.3 and the price elasticity of demand for US imports equals 0.2, does the dollar depreciation improve or worsen the US trade balance? Show the percentage change in balance of payment.

Explanation / Answer

Ans1. Total Doller Export 1000*3000 $3,000,000 Total Pound Import 10000*150 $1,500,000 1Pound=$2 1$=1/2 Pound 1$=.50 Pound Export computer 150000 Pound Import Auto 150000 Pound Therefore no gain no loss

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