Presentation #2
Chapter 8 1) According to Purchasing Power Parity (PPP), relatively high local inflation will increase imports, decrease exports, and the local currency should depreciate by same degree as inflation differential. If Thailand’s inflation is high, the revenue and costs of Blades will decrease, however the net effect will be negative because the company revenue portion coming from Thailand is larger than its cost portion. Also, since Blades is locked into a fixed price contract the net effect will be negative. 2) One of the factors that prevents PPP is government intervention such as changes in monetary or fiscal policies, but over the long run the PPP will hold. PPP would not hold if the prices and quantity of goods is locked because the exchange rates will still fluctuate. 3) Higher interest rates will cause baht to depreciate against the dollar for the same amount as the difference in the levels of inflation. 4) The company should be concerned with the high level of inflation in Thailand since baht will convert into fewer dollars, and the future demand will decrease because the products will be perceived as expensive. However, the PPP as a theory does have its limitations and frequently doesn’t hold, so Blades should be aware of other factors that can impact exchange rates like government intervention. 5) Blades should compare the differential in American and Thailand’s inflation rates to the percentage change in the baht’s value during