BUSN 5620 Current Economics Analysis For Current Economic Analysis

a.What is the current domestic price of a McDonald’s Big Mac? What is this price expressed in euros?

 

b.How does the price of a Big Mac in the “euro area” compare to the conversion you did in part a? What is the “euro area” price of a Big Mac when converted into U.S. dollars? Why might the comparison of domestic and foreign Big Mac prices differ from the exchange rate comparison of the euro and the U.S. dollar?

 

c.Check the exchange rate between the U.S. dollar and the euro. How has the U.S. dollar’s value changed compared to the euro over the past year? Has it appreciated or depreciated in value? Explain this change in terms of a change in demand for the U.S. dollar.

 

d.How could this change in exchange rates affect exports from the United States to European nations? What about imports from Europe to the United States? How might the trade balance change? Is a European Big Mac an import or an export?

Answer:

Problem1

A strong dollar is good to America due to the following reasons:

 It encourages inflow of foreign direct investments, No investor is interested in undertaking investments in an economy faced with a weak currency

Secondly, a strong dollar increases America’s gains from international trade and trade balance. With a strong dollar exports are expensive and importers cheaper. Meaning that more revenue is gained from international trade (Jongwanich, 2009).  

Equilibrium for the market of T-shirts is attained at E as Cleary explained in the figure above. The overall corresponding equilibrium price for the T-shirt is six reflecting the quantity at equilibrium (Abdulla, 2014).

(i) Without international trade, $11 will be the overall market price per T-shirt

(ii) Six T-shirts is the overall level of domestic consumption

(iii) Six T-shirts is the overall level of domestic production 

it is clearly illustrated that the economy has joined  international or free trade and hence unlimited Quantity equivalent to T-Shirts at the rate of $7is being supplied by foreigners. Therefore, the overall market price in the economy will automatically be $7 per every shirt. This is due to the fact that the overall price is less than that at equilibrium (Jongwanich, 2009). 

(i) Hence with presence of free trade

$7 per T-shirt will be the overall market price

(ii) Ten shirts will be the overall total of domestic consumption and is at point B ( James, 2008).

(iii) Four T-shirts will be the domestic production and is at point A

(i)$9 per T-shirt is the overall market price following imposition of $2 per T-shirt tariff

8-T shirts is the overall Domestic consumption and is at point G

5- T-shirts is the overall domestic production and is at point F Internet question

(a) The current domestic price for Mc is US$5.51

 1Euro is equivalent to $1.15

       Therefore US$5.51 will equal to

        =4.81 Euros

(B) The euro area overall average cost of a big Mac is equivalent to  $4.84 or €3.95 basing on the current exchange rate. The above means that the euro is currently being undervalued by 8.4 percentages when using the United States dollar as the bench mark (Henry, 2011).

The variation between the two currencies is due to the purchasing power parity. The United States dollars buys more big macks both in the domestic and foreign market in this case the euro market.

(c) In September 7 the euro was worth $1.16 meaning that 16 more cents in goods could be effectively bought by one euro compared to what 1 dollar can. The euro was valued at $1.20 in January 2018 compared to 2017 when it rallied by a margin of 14% against the USD and it ended at Euros 1.1979

(D) The improvement of the Euro currency means that exports from the United States of America will be easily affordable. In other words there will be slightly cheaper. One would require less Euros to buy goods from the United States of America. Meaning that the overall revenue gained from exporting goods to the European Union will reduce while the export demand will increase due to reduced prices. Imports from Europe to the United States of America will be more expensive meaning that there will be reduced importation since more dollars will be required to buy good from the European Union. The trade balance might reduce for the case of the US and increase for the case of Europe. The European big Mac is an export (James, 2008). 

References

Abdulla, M.(2014). Understanding Pip Movement in FOREX Trading (PDF) (Report).

Henry, T. (2011). "International Economics: Global Markets and Competition (3rd Edition)" Abstract.

James, R. (2008). "growth and international trade," The New Palgrave Dictionary of Economics. 2nd Edition

Jongwanich, J. (2009). "Equilibrium Real Exchange Rate, Misalignment, and Export Performance in Developing Asia". ADB Economics Working Paper. 151.