Question

Assume you wish to help residents of the developing country with aid. Based on the implied exchange rates above, is it better to send cash or goods? Why? (You must explain based on a comparison of the implied exchange rates - A good way to do so is to make the following comparison: If I send $1,000 worth of goods, how much will that country’s residents receive in goods? In contrast, if I send $1,000 in cash, how much will that country’s residents receive in goods? Hint: the actual exchange rate shows how dollars will convert into that country’s currency in foreign exchange, while the PPP exchange rate shows how many units of that country’s currency it would take to buy $1 worth of goods in that country.) Compare the relative amounts of goods you would be able to send with cash in comparison to sending goods (e.g. sending goods results in sending 50% more than sending cash).

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Answer 1

It is better to send goods. This is because due to presence of non traded goods their currencies are undervalued and thus they can buy less goods of foreign countries at official exchange rate