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Ken Garrett.
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gaya3790
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I have a question:
Which of the following organisations might benefit from a period of high price inflation?
A. An organisation which has a large number of long-term payables
B. An exporter of goods to a country with relatively low inflation
C. A large retailer with a high level of inventory on display and low rate of inventory turnover
the answer is B. I don’t get this question.
Ken Garrett
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A Let’s say you owe $1,000 and today you could sell goods for $1,000, that would repay the payables now. Let’s say, that you don’t sell the goods for another year and inflation is 10%. You would receive $1,100, enough to pay the $1,000 and to have $100 left. So, you benefit.
B The currency of a country with high inflation weakens with respect to that of the currency of a country with low inflation. Say the current £/$ rate is 1.3 $ to the £. If the UK rate of inflation is higher than the US rate, then in a year the rate might be 1.2 $ to the £. If you are exporting goods today and the UK price is £1000, the US price is $1,400. In a year the price would be $1,200, making you more competitive. However, the picture is more complicated because the costs of manufacture might have increased because of inflation and the selling price might not be held constant. So it’s not clear how things might work out.
C The goods were bought some time ago and can be sold for increasing prices because of inflation. Therefore a benefit.
It is not a good question.
gaya3790
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