Question

13. SHORT ANSWER:  Explain the phenomenon of currency devaluation. Assume that initially the US$1 = BR Real 4. What is the new price of the following products in BR Real if exchange rate changes to US$1 = BR Real 3.5?

1. An Ipad for US$250
2. An airline ticket to Brazil for US$900
3. A Brazilian barbecued dinner for US$30

Who would benefit more from the above exchange rate change – an American tourist in Brazil or a Brazilian tourist in the USA? Why?

Answer 1

Currency devaluation happens when purchasing power of one currency decreases relative to another currency, so the devalued currency buys less number of another currency than before.

(1)

Initial price = $250 x BR 4/$ = BR 1000

New price = $250 x BR 3.5/$ = BR 875

(2)

Initial price = $900 x BR 4/$ = BR 3600

New price = $900 x BR 3.5/$ = BR 3150

(3)

Initial price = $30 x BR 4/$ = BR 120

New price = $30 x BR 3.5/$ = BR 105

Since price in BR has decreased after new exchange rate, an American Tourist in Brazil will benefit more.