3. Currency depreciation and the elasticity approach Suppose the Japanese yen depreciates by 6% against the U.S. dollar. The following table shows the elasticities of demand in Japan and the United States. (Note: Throughout this analysis, assume that only Japan and the United States are relevant countries.) Japan's demand elasticity for imports Elasticity 2.1 The United States' demand elasticity for exports from 2.2 Japan Given that the sum of these elasticities of demand is will the Japanese trade position. 1.0, the elasticity approach predicts that the depreciation of the Japanese yen Use the elasticity approach for the remainder of this problem to confirm or refute its prediction about the Japanese trade position as a result of the yen depreciation. Assume the prices of imports remain constant in terms of foreign currencies. This means the 6% depreciation of the yen results in a 6% increase in the price of imported goods to Japan, but the yen price of exports remains constant. Use the elasticities of demand from the previous table to compute the change in the quantity of imports demanded by Japanese consumers as a result of the price increase. Then compute the change in the quantity of Japanese exports demanded by the United States as a result of the yen depreciation. Enter these values in the third column of the following table. (Hint: Use the minus sign to indicate a negative value, if necessary.) Change in Yen Price Change in Quantity Demanded Sector Imports Exports (Percent) 6 (Percent) Net Effect for Japan (Percent) 0 Net Exports You can compute the net effect of the 6% depreciation of the yen for Japanese imports and exports by adding the percentage change in price and quantity. Compute the net effect on Japanese imports, exports, and net exports. Enter these values into the final column of the previous table.
3. Currency depreciation and the elasticity approach Suppose the Japanese yen depreciates by 6% against the U.S. dollar. The following table shows the elasticities of demand in Japan and the United States. (Note: Throughout this analysis, assume that only Japan and the United States are relevant countries.) Japan's demand elasticity for imports Elasticity 2.1 The United States' demand elasticity for exports from 2.2 Japan Given that the sum of these elasticities of demand is will the Japanese trade position. 1.0, the elasticity approach predicts that the depreciation of the Japanese yen Use the elasticity approach for the remainder of this problem to confirm or refute its prediction about the Japanese trade position as a result of the yen depreciation. Assume the prices of imports remain constant in terms of foreign currencies. This means the 6% depreciation of the yen results in a 6% increase in the price of imported goods to Japan, but the yen price of exports remains constant. Use the elasticities of demand from the previous table to compute the change in the quantity of imports demanded by Japanese consumers as a result of the price increase. Then compute the change in the quantity of Japanese exports demanded by the United States as a result of the yen depreciation. Enter these values in the third column of the following table. (Hint: Use the minus sign to indicate a negative value, if necessary.) Change in Yen Price Change in Quantity Demanded Sector Imports Exports (Percent) 6 (Percent) Net Effect for Japan (Percent) 0 Net Exports You can compute the net effect of the 6% depreciation of the yen for Japanese imports and exports by adding the percentage change in price and quantity. Compute the net effect on Japanese imports, exports, and net exports. Enter these values into the final column of the previous table.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3. Currency depreciation and the elasticity approach
Suppose the Japanese yen depreciates by 6% against the U.S. dollar. The following table shows the elasticities of demand in Japan and the United
States. (Note: Throughout this analysis, assume that only Japan and the United States are relevant countries.)
Elasticity
Japan's demand elasticity for imports
2.1
The United States' demand elasticity for exports from
2.2
Japan
Given that the sum of these elasticities of demand is
will
the Japanese trade position.
1.0, the elasticity approach predicts that the depreciation of the Japanese yen
Use the elasticity approach for the remainder of this problem to confirm or refute its prediction about the Japanese trade position as a result of the
yen depreciation.
Assume the prices of imports remain constant in terms of foreign currencies. This means the 6% depreciation of the yen results in a 6% increase in
the price of imported goods to Japan, but the yen price of exports remains constant.
Use the elasticities of demand from the previous table to compute the change in the quantity of imports demanded by Japanese consumers as a result
of the price increase. Then compute the change in the quantity of Japanese exports demanded by the United States as a result of the yen
depreciation. Enter these values in the third column of the following table. (Hint: Use the minus sign to indicate a negative value, if necessary.)
Sector
Change in Yen Price
(Percent)
Change in Quantity Demanded
(Percent)
Net Effect for Japan
(Percent)
Imports
Exports
6
0
Net Exports
You can compute the net effect of the 6% depreciation of the yen for Japanese imports and exports by adding the percentage change in price and
quantity.
Compute the net effect on Japanese imports, exports, and net exports. Enter these values into the final column of the previous table.
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