Assessment of Purchasing Power Parity
1. What is the relationship between the exchange rates and relative inflation levels of the two countries? How will this relationship affect Blades’ Thai revenue and costs given that the baht is freely floating? What is the net effect of this relationship on Blades?
2. What are some of the factors that prevent PPP from occurring in the short run? Would you expect PPP to hold better if countries negotiate trade arrangements under which they commit themselves to the purchase or sale of a fixed number of goods over a specified time period? Why or why not?
3. How do you reconcile the high level of interest rates in Thailand with the expected change of the baht-dollar exchange rate according to PPP?
4. Given Blades’ future plans in Thailand, should the company be concerned with PPP? Why or why not?
5. PPP may hold better for some countries than for others. The Thai baht has been freely floating for more than a decade. How do you think Blades can gain insight into whether PPP holds for Thailand? Offer some logic to explain why the PPP relationship may not hold here.
|Blades, the U.S.-based roller blades manufacturer, is currently both exporting to and importing from Thailand. The company has chosen Thailand as an export target for its primary product, “Speedos,” because of Thailand’s growth prospects and the lack of competition from both Thai and U.S. roller blade manufacturers in Thailand. Under an existing arrangement, Blades sells 180,000 pairs of Speedos annually to Entertainment Products, Inc., a Thai retailer. The arrangement involves a fixed, baht-denominated price and will last for 3 years. Blades generate approximately 10 percent of its revenue in Thailand.|