Economics - Dollar/Euro Question

trogulj

Question:
Muller observes that the $/€ spot exchange rate was 0.9857 two years ago. What does a comparison of the spot rate predicted by PPP with the current spot rate, i.e., 0.9808, tell us about changes in the relative cost advantage of U.S. exporters vs. German exporters? Since the spot rate predicted by the PPP relationship is:
A) $1.0615 per euro, U.S. exporters have a competitive advantage relative to German exporters.
B) $0.9153 per euro, U.S. exporters have a competitive disadvantage relative to German exporters.
C) $1.0615 per euro, U.S. exporters have a competitive disadvantage relative to German exporters.
What should be the answer guys ?

segalm

any interest rate information provided?
in the absence of that… I can only say
$ has appreciated, Euro depreciated. So US Exporters would be able to export less. They are at a competitive disadvantage wrt German exporters.
so it is either B or C for me…

ruchita

how did you get the 1.0615?

Kapie

if future spot rate is 1.0615 (predicted by PPP), the situation of us exporters does not change.
But because the future spot (0.9808) is lower than the predicted one (1.0615) the situation of us exporters worsened and therefore have competitive disadvantage (=they earn less USD).
If the predicted rate were 0.9153 and future rate 0.9808, the us exporters would have competitive advantage.
so you dont need to know the rates and dont need to calc anything just compare the predicted rate and reality.
thats why I think it is C
cheers

Windjam

I would say C.
Since the predicted spot is higher than the current spot it would make it more difficult for people who use the Euro to purchase US goods therefore the US would have a comparative disadvantage.
Though the question looks like it would need a computation, none are actually needed to answer this question, just an understanding of PPP.
The question throws you for a minute by including the spot info from 2 years ago, but I don’t beleive this information is really relevant to the question.

sabre

FinNinja Wrote:
——————————————————-
Though the question looks like it would need a
computation, none are actually needed to answer
this question, just an understanding of PPP.
I’m pretty sure a computation is needed when the question states “Since the spot rate predicted by the PPP relationship is___”.
How are people getting the PPP spot rate from the information given?

DSquaredSlim

2010L2 - - Could we get the answer and explanation to this one please?

yospaghetti

No interest rates , and now no previous rate either? Cm’on ! Cannot have parity without 3 things . Parity with just 1 is impossible and with 2 it is guess work. All of you are wrong. Should be :
Cannot say for sure given the information on past and present fx rates alone.Need interest rate differential or at least a foward rate two years ago

AnalystAlan

janakisri Wrote:
——————————————————-
No interest rates , and now no previous rate
either? Cm’on ! Cannot have parity without 3
things . Parity with just 1 is impossible and with
2 it is guess work. All of you are wrong. Should
be :

Cannot say for sure given the information on past
and present fx rates alone.Need interest rate
differential or at least a foward rate two years
ago
I am sorry but I dont agree with you at all.
The idea is that if the spot rate follows PPP there is no competitive advantage for anyone. But if the spot rate behaves differently than there is advantage for someone.
If PPP says that future spot rate should be 1.0615 but it is in fact 0.9808 the us exporters will have less usd from their exports and therefore they have comp. disadvantage. (therefore C is ok and A is not)
Also If PPP says that future spot rate should be 0.9153 but it is in fact 0.9808 the us exporters will have more usd from their exports and therefore they have comp. advantage. (therefore B is not correct)
the question is not to calc rate predicted by PPP but what effect certain predicted rate has on comp. advantage.
ok?