Zixin, Inc., is the leading beer in Spain, with a 65% share of the market. Because of trade barriers, it faces essentially no import competition. Exports account for less than 2% of sales. Although some of its raw material is bought overseas, the large majority of the value added is provided by locally supplied goods and services. Over the past five years, Spanish prices have risen by 300%, while U.S. prices have risen by about 10%. During this time period, the value of the euro has dropped from €1 = $1.00 to €1 = $0.50.
1. What has happened to the real value of the euro over the past five years? Has it gone up or down?
2. What has the high inflation over the past five years likely done to Zixin’s euro profits? Explain