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A pair of hiking boots costs $120 in the U
A pair of hiking boots costs $120 in the U.S., if the real exchange rate is 6/5 and the nominal exchange rate is 2 Brazilian reais per dollar, what is the price of the same hiking boots in Brazil?
If a country's exports were 500 billion pesos and its imports were 300 billion pesos, what would its trade balance be?
A U.S. grocery store chain bought $800,000 worth of Kenyan currency from a bank in Kenya. It then used these funds to buy $800,000 worth of coffee from Kenyan coffee growers.
As a result of this exchange, by how much and in which direction did:
A. U.S. net exports change?
B. U.S. net capital outflow change?
Expert Solution
1) Computation of Price of the same hiking boots in Brazil:
Real Exchange Rate = Nominal Exchange Rate * (Price in Foriegn Country) / (Price in Domestic Country)
6/5 = 2 * 120/Price in Brazil
Price in Brazil = 120 * 2 * 5/6 = 200 brazilian reais
2) Computation of Trade Balance:
Trade Balance = Imports - Exports
= 300 billion pesos - 500 billion pesos
Trade Balance = -200 billion pesos
So, there is trade deficit of 200 billion pesos.
3)
A) As the funds are used to import $800000 worth of coffee thus net exports (i.e. exports-imports) have reduced. So, U.S. net exports decreased by $800,000.
B) Net capital outflows increased because of the imports worth $800,000. So, U.S. net capital outflows increased by $800,000.
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