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Students Zone - Answers to Case Study Questions
CASE STUDY 5.1: THE EFFECT OF EXCHANGE RATES ON BUSINESSES – THE US DOLLAR
- Identify the differing effects the low dollar has had on US and UK businesses.
Answers
a US business
i More tourists – greater spending on hotels, in restaurants and in shops (these are imports to UK or exports of US – when the dollar falls, US exports get cheaper and UK imports more expensive)
ii Increased exports boosts demand in the US
iii Generally lower dollar makes US exports more competitive. It also raises the price of US imports which could be inflationary (but little sign of this)
b UK business
i Less tourists – less spending on hotels, in restaurants etc – US holidays in Britain are UK exports and more expensive (US imports)
ii But as the article says “only rich Americans go abroad” and these are not sensitive to price changes – so how much is US demand for UK exports affected by price changes in the tourism sector?
iii More affected would be the more price sensitive sectors eg semi manufactured goods, non-luxury items
- What does the article suggest about the elasticity of supply and demand for sterling and dollars?
Answer
Elasticity of demand for sterling (for luxury items) – see (b.ii above) – appears insensitive to changes in the exchange rate therefore inelastic demand. Similarly those who buy UK holidays will supply US dollars – suggesting an inelastic supply.
The fact that the article suggests UK tourists are responding to price changes due to the lower value of the dollar suggests a more elastic demand for dollars (and supply of pounds).
Other chapter answers >>
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- Case study 1.3 Europe's International Trading Future
- Case Study 2.1 Porter's Diamond
- Case Study 2.2 The Coffee Market
- Case Study 3.1 Sugar Industry
- Case Study 3.2 FSC Dispute
- Case Study 3.3 Beef Hormones
- Case Study 4.1 SEM Effects of Business
- Case Study 4.2 Africa's Economic Integration
- Case Study 5 2 Real Exchange Rates in the Euro-Zone
- Case Study 6.1 SEC to Rethink Post-Enron Rules
- Case Study 6.2 A Controversial New European Directive
- Case Study 8.1 Cross-Border Banking Bids in Italy
- Case Study 8.2 The Future of the London Stock Exchange (LSE)
- Case Study 9.1 Back to Bread and Butter for Europe
- Case Study 9.2 Poductivity in European and International Labour Markets
- Case Study 11.1 Poorer EU Areas Lose Funding
- Case Study 11.2 A Diverse Approach to Curbing Greenhouse Gases
- Case Study 12.1 European and US Entrepreneurship Activity
- Case Study 12.2 EU Enlargement and the SME Sector
