dollar/pound exchange rate
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Assume that the United States exports 2,000 computers costing $5,000 each to the UK, and imports 200 UK autos at a price of £12,000 each. Assume that the dollar/pound exchange rate is $1.75 per pound.
Calculate in dollar terms:
a. The US export receipt
b.US import payments
c. Trade balance
d. Suppose the dollar’s exchange value depreciates by 10%. Assuming that the price elasticity of demand for exports for U S equals 0.5 and price elasticity of demand for US imports equals 0.2, does the dollar depreciation improve or worsen the US trade balance? Why?
e. Now assume that the price elasticity of demand for US exports equals 2 and price elasticity of demand for US imports equals 1. Does this change the outcome? Why?
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