Question

You are given the following information:

Quantity of exports 600

Domestic currency price of exports 15

Exchange rate (d/f) 1.25

i. Calculate the domestic and foreign currency currency values of exports.

ii. What will happen if the exchange rate falls to 1.10, assuming that the value of the elasticity of demand for exports is -0.2? Provide your final answers to 2 decimal points.

Answer 1

i)

Price in Foreign Currency = 15/1.25 = 12

Domestic Value of Exports = Quantity*Domestic Currency Price = 600*15 = 9000

Foreign Value of Exports = Quantity*Foreign Currency Price = 600*12 = 7200

ii)

NEW Price in Foreign Currency = 15/1.1 = 13.64

Elasticity of -0.2 means for every 1% increase in Price, Demand will reduce by 0.2%

Therefore, for Increase of (13.64-12)/12 = 13.67%, Demand will fall by 13.67*0.2 = 2.734%

Therefore, Demand i.e. Quantity of Exports will reduce by 600*2.734% = 16.404 = 16.4(approximately)