- This topic has 7 replies, 2 voices, and was last updated 2 years ago by
.
- Posts
Hi, I have the following question and I hope that I will receive the answer.
Which of the following organisations is most likely to benefit from a period of high price
inflation?
? An organisation which has a large number of long-term payables
? An exporter of goods to a country with relatively low inflation
? A supplier of goods in a market where consumers are highly price sensitive and
substitute imported goods are available
? A large retailer with a high level of inventory on display and low rate of inventory
turnover
The answer is A which I understand but I cannot figure out why B is wrong. I thought that if we are in a country which have high inflation compared to other countries, our currency will be weaken and hence cheaper in the foreign market. Can you explain if I understand it wrong ?It will mean that the country with the low inflation will be having to pay more for goods from the country with the high inflation, and is therefore likely to buy less (and buy from other countries where the price is lower).
In theory, that may be ‘cancelled’ out by the change in the exchange rate, but in practice that is not always the case.
I am sorry, but could you explain it more details ? I still have trouble understanding.
From what I understand is that
For example, if the current exchange rate is 1 USD = 23000 VND and now because my country has higher inflation which makes the exchange rate go up: 1 USD = 26000 VND, the US can buy more with the same amount of money that they have paid before.
I know you said that it is not always the case in practice but I always this method when i try to understand about exchange rate.The question is not asking about exchange rates, and exchange rates change due to many factors in practice – not just the rate of inflation.
My previous explanation stays the same 🙂
Thank you so much for your reply but I still have a hard time understanding this. Why a company with low inflation has to pay more for goods from the country with high inflation ?
Again, thank you so much for your patienceWhen there is high inflation the cost of everything increases. The producer in the country with high inflation will have put up their prices to cover all of their higher costs.
- The topic ‘Financial management environment’ is closed to new replies.