Question

A Swiss watchmaker imports watch components from Norway and exports watches to the United States. Suppose the dollar depreciates, and the Norweigan kroner appreciates relative to the Swiss franc. What impact would this have on the Swiss watchmaker? Explain in detail.

Answer 1

Solution -

If the dollar depreciated relative to the franc, this means that it took more dollars to get the francs necessary to buy a watch. In other words, the watch becomes more expensive in dollar terms which would cause a decline in imported watches purchased in the United States. Second, if the krona appreciated relative to the Swiss franc, this is the same thing as saying that the franc depreciated relative to the krona. In other words, it took more Swiss francs to buy parts in Sweden than it did previously. As a result, the imported components for the watches became more expensive to the Swiss company. The Swiss watchmaker was hurt twice. Its costs rose while its export sales declined

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