AvtoVAZ OAO, a leading auto manufacturer in Russia, was launching a new automobile model in 2001, and

Question:

AvtoVAZ OAO, a leading auto manufacturer in Russia, was launching a new automobile model in 2001, and is in the midst of completing a complete pricing analysis of the car for sales in Russia and export. The new car, the Kalina, would be initially priced at Rubles 260,000 in Russia, and if exported, $8,666.67 in U.S. dollars at the current spot rate of Rubles 30 = $1.00. AvtoVAZ intends to raise the price domestically with the rate of Russian inflation over time, but is worried about how that compares to the export price given U.S. dollar inflation and the future exchange rate. Use the following data table to answer the pricing analysis questions.

a. If the domestic price of the Kalina increases with the rate of inflation, what would its price be over the 2002-2006 period?
b. Assuming that the forecasts of US and Russian inflation prove accurate, what would the value of the ruble be over the coming years if its value versus the dollar followed purchasing power parity?
c. If the export price of the Kalina were set using the purchasing power parity forecast of the ruble-dollar exchange rate, what would the export price be over the 2002-2006 period?
d. How would the Kalina's export price evolve over time if it followed Russian inflation and the exchange rate of the ruble versus the dollar remained relatively constant over this period of time?
e. Vlad, one of the newly hired pricing strategists, believes that prices of automobiles in both domestic and export markets will both increase with the rate of inflation, and that the ruble/dollar exchange rate will remain fixed. What would this imply or forecast for the future export price of the Kalina?
f. If you were AvtoVAZ, what would you hope would happen to the ruble's value versus the dollar over time given your desire to export the Kalina? Now if you combined that 'hope' with some assumptions about the competition -- other automobile sales prices in dollar markets over time -- how might your strategy evolve?
g. So what did the Russian ruble end up doing over the 2001-2006 period?