Assume the Hong Kong dollar ( HK } ) value is tied to the U.S. dollar and will remain tied to th

step 1 Here we are looking at a graph depicting long -run aggregate supply and short -run aggregate sup

Assume the Hong Kong dollar ( HK } ) value is tied to the...

Assume the Hong Kong dollar ($$ \mathrm{HK \$} $$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, $$ \mathrm{HK \$} $$ =$$\$0.25$$ Singapore dollars. Today, a $\mathrm{HKS}=0.30$ Singapore dollars. Assume that there is much trade in the computer industry among Singapore, Hong Kong, and the United States and that all products are viewed as substitutes for each other and are of about the same quality. Assume that the firms invoice their products in their local currency and do not change their prices. a. Will the computer exports from the United States to Hong Kong increase, decrease, or remain the same? Briefly explain. b. Will the computer exports from Singapore to the United States increase, decrease, or remain the same? Briefly explain.

Assume the Hong Kong dollar ($$
\mathrm{HK \$}
$$)
value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, $$
\mathrm{HK \$}
$$
=$$\$0.25$$ Singapore dollars. Today, a $\mathrm{HKS}=0.30$ Singapore dollars. Assume that there is much trade in the computer industry among Singapore, Hong Kong, and the United States and that all products are viewed as substitutes for each other and are of about the same quality. Assume that the firms invoice their products in their local currency and do not change their prices. a. Will the computer exports from the United States to Hong Kong increase, decrease, or remain the same? Briefly explain.
b. Will the computer exports from Singapore to the United States increase, decrease, or remain the same? Briefly explain.

Key Concepts

Pegged Exchange Rate

A pegged or fixed exchange rate is when a country’s currency value is tied to another major currency. In this system, fluctuations between the pegged currency and the anchor currency are minimized, meaning that relative prices for goods invoiced in the pegged currency remain stable when exchanged for the anchor currency.

Currency Appreciation and Depreciation

Currency appreciation occurs when a currency increases in value relative to another, while depreciation happens when it decreases. These changes directly affect the cost of imports and exports; a currency that depreciates makes a country’s exports cheaper for foreign buyers, whereas a currency that appreciates makes exports more expensive and imports cheaper.

Local Currency Invoicing

When products are invoiced in the seller's local currency, the domestic price is fixed in that currency regardless of exchange rate movements. This means that any changes in the relative value of the importer’s currency will alter the product’s price in that importer’s market, affecting the competitiveness of goods in international trade.

International Trade Competitiveness

International trade competitiveness is influenced by relative price movements due to exchange rate fluctuations. When one currency depreciates relative to others, its exported goods become more competitively priced in the international market, potentially increasing exports, while imports become relatively more expensive.

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