University International Finance Assignment: Currency Analysis

This assignment analyzes international finance concepts, focusing on a two-country model (America and China) producing tradable and non-tradable goods. The solution calculates the price of goods in local currencies based on labor costs and productivity. It determines the exchange rate using purchasing power parity (PPP) and assesses the undervaluation of the USD. The assignment explores the impact of changes in labor productivity on real exchange rates and provides a bibliography of relevant sources. The analysis covers topics such as currency valuation, exchange rates, and the impact of labor costs on trade and market dynamics, providing a detailed understanding of international finance principles.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student:
Name of the University:
Author’s Note:

1INTERNATIONAL FINANCE
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
Question 3........................................................................................................................................2
Question 4........................................................................................................................................3
Question 5........................................................................................................................................3
Question 6........................................................................................................................................4
Question 7........................................................................................................................................4
Bibliography....................................................................................................................................5

2INTERNATIONAL FINANCE
Question 1
In order to determine the price in the local currency the components that will be taken
into account for the purpose of analysis will be the per unit of goods produced in an hour and the
associated labour cost involved in the production of the goods. The price in local currency of a
unit of the traded good (T):
America: 10 units/ $10 = $1
China: 5 units / 10 Yuan = 0.50 Yuan
Question 2
The price in local currency of a unit of the non-traded good (NT) can be well determined
with the help of total non-tradable units produced along with the associated cost for the product
which is as follow:
America  5 units/ $10 = 0.50 cent
China  5 units / 10 Yuan = 0.50 cent
Question 3
The value of one Yuan in terms of USD can be well calculated with the help of the price
determined for each of the currency in the local currency where the price for tradable good in
America for one unit of good was around $1 and on the other hand the price of the goods in
China for the Yuan Currency would be 0.50 Yuan. The appropriate market rate will be
CNY/USD = 0.5/1 will be taken into analysis.

3INTERNATIONAL FINANCE
Question 4
As per the given situation in the assignment the cost of labor for tradable goods is equal to $10
for 10 units so the cost of 1 unit of this good is equal to $1/10 per unit. Also the cost of non-
tradable goods in America is $ 10 for 5 units, so the cost of 1 unit of this good is equal to $1/5
per unit. Thus the overall cost for the basket of goods in America is equal to 1/10+1/5 which
comes to 3/10 Per Labor hour.
Thus the cost of living in America= (3/10)*10= $3
Also the cost of labor for tradable goods in china is equal to 10 Yuan for 5 units of
tradable goods, thus the cost of 1 unit of this good is equal to Yuan 5/10 per unit. Also 5 units of
non- tradable goods cost 10 Yuan in china, thus 1 unit of non-tradable goods cost Yuan 5/10 per
unit. Thus the overall cost of basket of goods in China is equal to 5/10+5/10 which is equal to
1/10 Per Labor hour.
Thus the cost of living in China = (1/10)*10= Yuan 1
Question 5
The absolute purchasing power parity exchange rate is given by,
1 Yuan = How many Dollars
Thus the exchange rate is equal to,
1 Yuan = 3 Dollars.

4INTERNATIONAL FINANCE
Question 6
As per the PPP level the USD is undervalued as before we could only get only $ 2 per
Yuan, but the exchange rate has become $ 3 per Yuan, thus the USD has become undervalued
with respect to Yuan.
The reason for the undervaluation of the currency is that the labor cost for traded goods in
America is reasonably cheaper than china, thus it leads to the undervaluation of the currency.
Thus the value of the exchange rate when CNY is the commodity currency is given by,
that the cost of tradable goods is equal to 5/10 labor hours multiplied with Yuan 10. So the cost
of tradable goods comes to about 5 Yuan.
Question 7
If the productivity per hour of labour increases to 10 Units of T then the price in local
currency of a unit of the tradable good (T) will increase China: 10 units / 10 Yuan = 1 Yuan and
the real exchange rate would be CNY/USD: 1/1. The real exchange rate would improve as the
China would be able to produce more amount of goods for the given set of Yuan Amount.

5INTERNATIONAL FINANCE
Bibliography
Antonakakis, N. and Kizys, R., 2015. Dynamic spillovers between commodity and currency
markets. International Review of Financial Analysis, 41, pp.303-319.
Weale, M., Blake, A., Christodoulakis, N., Meade, J.E. and Vines, D., 2015. Macroeconomic
policy: Inflation, wealth and the exchange rate. Routledge.
Yee, S. and Ramirez, M.D., 2016. Purchasing Power Parity: A Time Series Analysis of the US
and Mexico, 1995–2007. International Advances in Economic Research, 22(4), pp.409-419.