Over the past year, China has experienced an inflation rate of about 22%, in contrast to U.S. inflation of about 3%. At the same time, the exchange rate has gone from Y8.1/U.S.$1 to Y7.6/U.S.$1.

a. What has happened to the real value of the yuan over the past year? Has it gone up or down? A little or a lot?

b. What are the likely effects of the change in the yuan’s real value on the dollar profits of a company like Procter & Gamble that sells almost exclusively in the local market?

c. What are the likely effects of the change in the yuan’s real value on the dollar profits of a textile manufacturer that exports most of its output to the U.S.? What can it do to manage these effects?