You are the international cash manager a steel manufacturing company in South Africa. The South African exchange rate has recently fallen to R16.70/US$. In your team meeting, various colleagues raise their views on the expected movements in the imports, exports and current account balance of South Africa. Which one of the following statements is false?
Mike: “In the short and long term, exports will necessarily increase (as they become relatively cheaper for foreign customers) and imports will necessarily fall (as they become relatively more expensive for South Africans). Therefore, the current account balance of South Africa will necessarily increase in the short and the long-term.”
Nancy: “All else equal, other foreign companies can also be expected to lower their prices. Therefore, imports from South Africa will not necessarily increase.”
Thato: “Many international trade transactions are prearranged and cannot be immediately adjusted. So, a weaker South African Rand may be attractive to foreigners, but they may not be able to immediately increase demand because they are tied into other existing contracts.”
Surisha: “A weakening of the South African Rand is not necessarily against all currencies at the same time. Also, in an extreme case- if all other currencies weaken as well, the net effect will be zero.”
Thato
Nancy
None of the above
Surisha
Mike
