Assume that you are the international trade manager of XYZ Inc. Because your firm exports goods, to Mexico, your job as international trade manger requires you to forecast the value of year, your firm exported one-billion-peso worth of products to Mexico. The exchange rate between US dollar and Mexican peso was $.02/peso. Now, you are expecting that the following changes will take place in the markets. Assume that everything else remains the same.
1. Last year, the inflation rate in the US was 3% and 8% in Mexico. Now, you are expecting that the following change will take place in the markets. Next, year, the inflation in the US is expected to be 2% while it will increase to 9% in Mexico. With each percentage change in the differential inflation, there will be a 5% change in the demand for exports by the Mexican customers. In addition, for each percentage change in the differential inflation, there will be a 1.5% change in the value of the Mexican peso. Explain how the above changes will affect the value of exports of your company to Mexico.
2. Last year, GDP growth rate in the US was 2.5% while it was 3% in Mexico. Next year, you expect that the national income of US will increase by 3% while Mexican national income, will increase by 4.5%. for each percentage change in the differential national income, there will be a 3% change in the differential national income, there will be a 2% change in the value of the peso. Explain how the above changes will affect the value of exports of your company to Mexico.
Please list detailed steps as to how you came up with your answers.