You are a purchasing manager for Toyota’s car factory in Cambridge, Ontario, and need to decide whether you should buy steel from a supplier in China or source it from Dofasco in Hamilton. If you buy it from Hamilton, you’ll pay $3,000 per metric tonne. If you buy from China, you’ll pay 14,000 yuan per metric tonne. Both prices include transportation costs. The nominal exchange rate is C$1 for 5 yuan.

a. Calculate the real exchange rate—the price of domestic steel in dollars, relative to the price of imported steel converted into dollars—and use this to decide whether you should buy the domestic or imported steel.

b. A rise in the cost of Chinese labour leads to a rise in the price of Chinese steel to 28,000 yuan per metric tonne.

The nominal exchange rate is still C$1 for 5 yuan. What has happened to the real exchange rate? Does this make it more or less likely that the Cambridge car factory purchases steel from Dofasco in Hamilton?

Learning Objective 16.5 Track how money flows around the world using the current account and the financial account.