Over the past year, China has experienced an inflation rate of about 22 percent, in contrast to U.S. inflation of about 3 percent. At the same time, the exchange rate has gone from Y8.7/U.S.$1 to Y8.3/U.S.$1.
a. 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?
b. 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?
c. 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?