Application Exercise 8v: Converting currency
- Arianne and Chiara each want to buy a pair of designer jeans from the US that cost USD$150. Calculate the how much Arianne and Chiara will have to pay for each pair of jeans at the following exchange rates:
Price in AUD
AUD$1 = USD$0.85
The AUD appreciates to AUD$1 = USD$1.50
The AUD depreciates to AUD$1 =USD$0.50
- Describe what happens to how much they will have to pay for the imported jeans when the AUD dollar:
- Appreciates – the amount of AUD they pay for the jeans decreases
- Depreciates – the amount of AUD they pay for the jeans increases
- Zara is an EXPORTER. She sells accommodation to Chinese holiday makers at her property on the Gold Coast. One night’s accommodation is AUD$180. Calculate how much the Chinese customers have to pay at the following exchange rates:
Price in CNY
AUD$1 = CNY$5
The AUD appreciates to AUD$1 = CNY $10
The AUD depreciates to AUD$1 = CNY $2
- Describe what happens to how much Chinese customers pay per night for their Australian holiday when the AUD dollar:
- Appreciates – they pay more CNY per night for accommodation
- Depreciates – they pay less CNY per night for accommodation
- Explain whether the amount of $AUD that Zara receives from the Chinese holiday makers per night changes when the exchange rate changes.
Zara continues to receive the same amount – $180 per night- for the accommodation even when the AUD exchange rate changes.
- Referring to the answers you have just completed explain why exporters prefer a ‘low’ AUD exchange rate and importers (including Australian tourists travelling overseas) prefer a ‘high’ AUD exchange rate.
Exporters prefer a ‘low’ AUD exchange rate because this makes our exports more attractive to foreign customers. In the case of Zara selling accommodation, the price of the accommodation per night for for the Chinese customer is much lower as the AUD depreciates, compared to when the AUD is high in value. The opposite is true for Australian importers. If they are buying jeans from overseas, and the AUD depreciates, each pair of jeans becomes more expensive for them to purchase.
- Evaluate the effect of a depreciation in the Australian dollar exchange rate (AUD) on the economy (producers and consumers). In your answer, explain one positive effect and one negative effect.
One positive effect of a depreciation of the AUD on the economy (producers and consumers) is that Australia’s exported products become cheaper for overseas customers, making them more attractive (more internationally competitive). One negative effect of a depreciation of the AUD on the economy is that imports into Australia – including items bought directly by consumers, and items bought by Australian producers to use in production – become more expensive, increasing the cost of living for many Australians.