Paper three question on international trade

1. A student from Mumbai wins a place at an American university at the market exchange
rate of 64 Rupees = 1 US$. The expenses of studying in America include an annual tuition
fee of US $35,000 and the student also expects to incur living expenses of $1,000 per month.

(a) Define the term exchange rate. [1 mark]

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(b) Calculate the expected annual expenses measured in Indian Rupees. [1 mark]

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Shortly before arriving in the country the Rupee depreciates against the US$ by 8.75 %.

(c) Calculate the new exchange rate between the two countries. [1 mark]

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(d) Calculate the new yearly cost in Rupees required to pay for tuition and living expenses
during their first year of studies, as a result of the devaluation of the currency. [1 mark]

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(e) Use the following demand curve to illustrate the depreciation of the INR. [2 marks]

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(f) Using the diagram from part (d), explain two reasons why the INR may have depreciated
relative to the US$. [4 marks]

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(g) The exchange rate between the INR and the US$ / Euro € is illustrated in the following
table:

Price of INR / US$ Price of INR / Euro

€
2019 69.3 79
2020 76.22 86
2021 74.3 88.2

Using this information above, express the exchange rate of India as an index for 2019 and
2021. [2 marks]

Price of INR / US$ Price of INR / Euro

€
2019 100 100
2020
2021

(h) Explain why some economists use an index to represent statistical data such as exchange
rates. [2 marks]

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(i) Given the data in (f) calculate the exchange rate between the US$ and the Euro during the
same years. [2 marks]

Price of US$ / €
2019
2020
2021

(j) Based on the information contained in questions (g), suggest whether attending European
universities might be more accessible to Indian students. [2 marks]

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(k) Explain how the depreciation of the INR is likely to affect the number of Indian students
studying abroad. [2 marks]

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(l) Using the information in this passage and your knowledge of economics, recommend an
appropriate policy that the Indian government might take to increase university participation
rates in its own nation? [10 marks]

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InThinking www.thinkib.net/Economics 3
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[end of question]

© Mark Johnson,
InThinking www.thinkib.net/Economics 4