Problem: Over the past year, China has experienced an inflation rate of about 17 percent, in contrast to U.S. inflation of about 2.5 percent. At the same time, the exchange rate has gone from Y8.7/U.S.$1 to Y8.2/U.S.$1.
Q1. What has happened to the real value of the yuan over the past year? Has it gone up or down? A little or a lot?
Q2. What are the likely effects of the change in the yuan's real value on the dollar profits of a company like Procter & Gamble that sells almost exclusively in the local market?
Q3. What are the likely effects of the change in the yuan's real value on the dollar profits of a textile manufacturer that exports most of its output to the United States? What can it do to cope with these effects?