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BUSN 5620 Current Economics Analysis
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BUSN 5620 Current Economics Analysis
0 Download3 Pages / 548 Words
Course Code: BUSN 5620
University: Webster University
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: United States
Questions:
(a)Graph these market conditions and identify when there is an absence of trade (i) the market price, (ii) domestic consumption, and (iii) domestic production.
(b)Now suppose that foreigners enter the market, offering to sell an unlimited supply of T-shirts for $7 apiece. Now with free trade, identify (i) the market price, (ii) domestic consumption, and (iii) domestic production.
(c)If a tariff of $2 per T-shirt is imposed, with this trade barrier, identify (i) the market price, (ii) domestic consumption, and (iii) domestic production.
Answer:
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
In the above figure 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).
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.
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