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 Subject: Conducting business with Japan Category: Business and Money > Economics Asked by: jara6650-ga List Price: \$25.00 Posted: 08 Apr 2004 07:12 PDT Expires: 08 May 2004 07:12 PDT Question ID: 327118
 ```You work for a company that conducts business with Japan and current economic environment is as explained below. The inflation rate in the U.S. and Japan are 4% and 2%, respectively and the current spot rate is \$.0083333 per one Japanese yen or 120 Japanese yen per one U.S. dollar. How much does the U.S. dollar have to depreciate in order to maintain purchasing power parity? Be sure to show your calculations. Note: I need at least 2 pages in length (If possible).``` Request for Question Clarification by paul_b_18-ga on 08 Apr 2004 07:23 PDT ```Hi, I can give you the calculations and the answer. I can also give you an explanation. However, I can't give you an answer which has a length of two pages. Would you be satisfied with an answer with the above mentioned elements, but which is much shorter than two pages? Please let me know as I'm sure I can help you. Thanks, paul_b_18``` Clarification of Question by jara6650-ga on 08 Apr 2004 08:10 PDT `Yes, That's fine. Thank you.`
 ```Hi, In the original situation in your case 1 dollar equals 120 yen. This means the exchange rate between the US and Japan is 0.0083333333 USD/Yen.   The ?Dictionary of Economics? gives the following definition of Purchasing Power Parity: ?A theory which states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent.? Source: About.com http://economics.about.com/cs/money/a/purchasingpower.htm   This means that a certain good should cost the same in Canada and the United States once you take the exchange rate into account.   Suppose a hamburger costs 1 dollar in the US, then that same hamburger will cost 120 yen in Japan in the original situation (where we have PPP). Here then we have a ratio of 1:120 for the price of the hamburger. At that moment the inflation rate in the US is 4 % and the inflation rate in Japan is 2 %. This means that the hamburger in the US will rise in price to 1 x 1.04 = 1.04 dollar and that same hamburger in the Japan will rise in price to 120 x 1.02 = 122.4 yen. We then have a ratio 1.04 to 122.4 for the price of the hamburger. Considering the exchange rate of 0.0083333333 USD/Yen, there no longer is Purchasing Power Parity.   If want to retain Purchasing Power Parity, we need to get the ratio of 1 x 120 for the price of the hamburger (because it should equal the ratio of the exchange rate). The price of the hamburger should be 122.4 / 120 = 1.02 dollar. In order to achieve this ratio the dollar will have to depreciate 100 ? (1.02 / 1.04 ) = 0.0192307692 % or 0.02 cents.   More information about the Purchasing Power Parity theory can be found here:   1. ?Wikipedia.org? http://en.wikipedia.org/wiki/Purchasing_power_parity   2. ?About.com? http://economics.about.com/cs/money/a/purchasingpower.htm   Search strategy: Google: "purchasing power parity"   I hope you have enough information. If you need any more, please ask for a clarification!   Thank you, paul_b_18``` Request for Answer Clarification by jara6650-ga on 08 Apr 2004 14:44 PDT ```Hello paul_b_18-ga I have another question posted under the "Doing Business with Japan" title. Can you work this one too. Please let me know. Thanks. jara6650``` Clarification of Answer by paul_b_18-ga on 08 Apr 2004 15:51 PDT ```Hi, Of course I am willing to help you with another question! However, as with your last question I need to know if the answer may be substantially shorter than two pages. If you found my previous answer long enough, please let me know and I will start working on it straight away! Thanks for your tip and rating by the way! paul_b_18```
 jara6650-ga rated this answer: and gave an additional tip of: \$5.00 ```paul_b_18-ga Thank you so much for your answer to my question. I look forward to have you work another one of my situations. Have a great day. jara6650```