International Trade Flows for Mesa Company
Not what you're looking for?
Mesa Company specializes in the production of small fancy picture frames, which are exported from the U.S. to the United Kingdom. Mesa invoices the exports in pounds and converts the pounds to dollars when they are received. The British demand for these frames is positively related to economic conditions in the United Kingdom. Assume that British inflation and interest rates are similar to the rates in the U.S. Mesa believes that the U.S. balance-of-trade deficit from trade between the U.S. and the United Kingdom will adjust to changing prices between the two countries, while capital flows will adjust to interest rate differentials. Mesa believes that the value of the pound is very sensitive to changing international capital flows, and is moderately sensitive to international trade flows. Mesa is considering the following information:
*The U.K. inflation rate is expected to decline, while U.S. inflation rate is expected to rise.
*British interest rates are expected to decline, while U.S. interest rates are expected to increase.
1. Explain how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant). Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant).
3. Mesa believes international capital flows shift in response to changing interest rate differentials. Is there any reason why the changing interest rate differentials in this example will not necessarily cause international capital flows to change significantly? Explain
449 words
Purchase this Solution
Solution Summary
This solution discusses how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant), as well as how the international capital flows should adjust in response to the changes in interest rates. This solution is 449 words.
Solution Preview
Explain how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant). Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant).
With higher domestic inflation rate, the exports of US will started declinining as importers in countries like UK will find it costly to import from USA. On the other hand, import of goods in USA will increase as offshore products will appear cheaper. This will especially happen if the exchange rate does not adjust to inflation changes. If the exchange rate immediately adjusts the inflation difference, then effect will be minimal. ...
Education
- BCom, SGTB Khalsa College, University of Delhi
- MBA, Rochester Institute of Technology
Recent Feedback
- "Thank you. "
- "Thank you"
- "Thank you. I got 20/20 last week for my discussion you help me out with."
- "Thank you. Great Job. "
- "Thank you. Great Job. "
Purchase this Solution
Free BrainMass Quizzes
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)