Question

Imagine that you carried out a transaction for Product A with
your German credit card during your stay in Brazil. The currency of
Brazil is the Real (BRL), while that of Germany, as you know, is
the Euro (EUR).

a) Please include and interpret a graph that shows the evolution of
the nominal exchange rate EUR/BRL in the last years (suggested
platforms XE.com, or also on google directly). What is the nominal
exchange rate on the day of the exam?

b) Let us assume that your credit card transaction for Product A
amounts to 4500 BRL. Let us also assume that there are no acquiring
and interchange fees, in order to simplify the problem. If the
exchange rate that the bank charges is 10% higher than the nominal
exchange rate, how much do you have to pay in euros to your German
bank?

c) Imagine that the price of the same Product A is 900 EUR in
Germany. Since you know how to calculate real exchange rates, you
decide to find ??????/???, taking the nominal rate from a) into
consideration.

d) If Product A is bought massively by German residents who visit
Brazil, caeteris paribus (all other things remain equal), what
could we observe on the balance of payments of Brazil and Germany?
Explain using the components of the Balance of Payments.

Answer #2

**A.** The following chart from xe.com shows the
movement of BRL/EUR exchange rate over the last 10 years.

today is 3rd of July. Today the exhange rate is 6.02041

**B.** Since I am paying in EUR, let us see how
many EUR I have to pay nominally.

4500/6.02041= 747.457399081

Now, onver it, I will have to pay 10% extra. So, I will pay

747.457399081*1.1= **822.203138989 EUR**

**C.** Excluding exchange rate fee, I paid
747.457399081EUR for a product that was of 900EUR in Germany. So,
real exchange rate

=900/747.457399081 = 1.204082

**D.** German tourists buying anything in Brazil is
effectively an import for Germany and an export for Brazil. This
will affect the current account of both countries. Brazil's current
account surplus will increase while Germany's current account
deficit will increase.

answered by: anonymous

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