Recent empirical evidence has suggested a strong increase in demand for low-quality baseballs. It is reported that this sudden increase in the demand for baseballs stems from the rise in the popularity of Major League Baseball. Low quality baseballs are typically used as practice baseballs for little league baseball teams and for use in unorganized play. Since the target market consists largely of young adolescents, it is believed that this venture has long-term profitability. As a result, these baseballs are currently marketed to little-league aged baseball players, globally. Many small producers, scattered globally currently serve this perfectly competitive market, where each firm is a price taker. A Haitian-American limited partnership is considering entering this market with a DFI project in Haiti. Barring political instability, Haiti is seriously considered because of its endless supply of low-skill labor, its proximity to the U.S. (the major market where 80% of the demand resides) and the partnerships influence over the public policy through its lobbying efforts (in Haiti and in the U.S.). The general partner is a Haitian-American with strong ties to her homeland. The partnership plans to employ all of the firms inputs from Haiti and sell the baseballs in the global market, using the U.S. dollar as the currency habitat of price. The project requires an initial investment of 100 million Gourdes and is expected to produce profits of 50 million Gourdes in the first year of operation and 150 million Gourdes in the second through fifth years of operations. Due to expected political unrest, the project will be terminated and all relevant capital will be salvaged at 10% of initial cost after the fifth year of operation. The current spot exchange rate is 38 Gourdes/1U.S. $. The risk-free interest rate is 2% in the U.S. and 7% in Haiti. The multinational thinks that the required rate of return on the market portfolio in the U.S. is 10%, and estimates that the project beta is about 1.5. There is no information on the required rate of return in Haiti. During the first year of operation, there is a failed coup attempt against the president of Haiti. Dissidents attempt to oust the leader and members of his administration; as a result of the increase in political instability, Haitians react by transferring capital abroad in OffShore accounts.

Analyze the effect of this political event on the Haitian Gourde/US$ exchange rate. What is the net effect on the nominal and real exchange rates?

Use supply/demand analysis to determine the net effect of the capital flight on the dollar-price of the firms baseballs, the number of baseballs produced and profit level.