Question

Suppose that a US-based company is buying Chinese goods. Current exchange rate for Chinese Yuan is 0.15 USD. The price of goods is ¥13,000 per unit. The company is buying 800 units per year with a fixed contract for the next two years. Suppose that Chinese Yuan appreciate to 0.2 USD in the next year. The US importer will respond to this by lowering the demand to 600 units in the third year.

a) What cash flow will be reflected on the balance of payments at the end of the first year?
b) What cash flow will be reflected on the balance of payments at the end of the second year?
c) What cash flow will be reflected on the balance of payments at the end of the third year?

Answer 1

a) $1,560,000 b) $2,080,000 c) $1,560,000. The price of each unit is ¥13,000, so the total cost in Chinese yuan will be ¥13,000 * 800 = ¥10,400,000.

Step-by-step explanation:

a) At the end of the first year, the US importer will have to pay for the 800 units of goods they bought. The price of each unit is ¥13,000, so the total cost in Chinese yuan will be ¥13,000 * 800 = ¥10,400,000. To convert this to USD using the exchange rate of 0.15, the cash flow on the balance of payments will be $10,400,000 * 0.15 = $1,560,000.

b) At the end of the second year, the US importer will again have to pay for 800 units of goods. The price of each unit remains the same, so the total cost in Chinese yuan will still be ¥10,400,000. However, the exchange rate has changed to 0.2, so the cash flow on the balance of payments will now be $10,400,000 * 0.2 = $2,080,000.

c) In the third year, the US importer will only be buying 600 units of goods. The price of each unit remains the same, so the total cost in Chinese yuan will be ¥13,000 * 600 = ¥7,800,000. With an exchange rate of 0.2, the cash flow on the balance of payments will be $7,800,000 * 0.2 = $1,560,000.