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Rupee Dip Won't Spoil Holiday Plans

CASE FLYER, MANAGERIAL ECONOMICS
ET Cases, 5 pages
AUTHOR(S) : Syed Abdul Samad and Dr. Nagendra V. Chowdary

Case Preview

Rupee Dip Won't Spoil Holiday Plans

 

Expected Learning Outcomes

• Depreciation of a currency, exchange rate determination and the PPP theory in exchange rate determination
• Difference between depreciation and devaluation of a currency
• Depreciation of a currency affects an individual consumer, a company as well as a country

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I. Exchange Rates, PPP Theory, Depreciation and Devaluation of a Currency

1. What is exchange rate and how is it determined?
2. What are the different types of exchange rates that different countries adopt to manage their respective currency value in international markets?
3. What is the difference between nominal exchange rate and real exchange rate?
4. What is the difference between depreciation of currency and devaluation of currency? What is competitive devaluation of currency?
5. ..................

II. Exchange Rates, Depreciation and Devaluation of a Currency: ‘G-I-C’ Analysis

1. How does either appreciation or depreciation of a currency affect the following:

a. A software/IT company employee working on a short-term assignment abroad
b. A dependent Indian receiving annual remittances from a Non-Resident Indian
c. A company involved in imports and exports
d. Government forced to import sugar due to seasonal shortfall

2. How does devaluation of a currency affect all the above?
3. .............

III. Rupee Depreciation and Individual Holiday Plans

1. What do you understand by rupee appreciation and rupee depreciation?
2. While exchange rate between US dollar and Indian Rupee was 1:1 in 1947, it is 1:66.16 on September 27th 2015. What explains this difference in exchange rates?
3. In the base article1 63.8% of the respondents have said that they would consider foreign travel even when the rupee is falling. What are the reasons for the same?
4. ...........

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Teaching Note Preview

Rupee Dip Won't Spoil Holiday Plans

 Synopsis

On September 27th 2015, the Indian Rupee depreciated to 66.16 against a US Dollar. However, the base article says that the rupee’s slide has had no major impact on the traveller’s budgets, travel destinations (international or domestic), mode of travel, duration of holiday, accommodation, food, adventure or shopping. An analysis of the information presented in the base article would sensitize participants/students as to how depreciation of a currency affects an individual consumer. With relevant and related concepts – exchange rates, Purchasing Power Parity (PPP) and devaluation of a currency – this case flyer can be used to explain how macroeconomic variables affect a microeconomic unit i.e., individual consumer. Apart from the individual consumer, the case flyer also analyzes the effects of currency depreciation on exporters/importers, companies, government, etc. It also debates about the role of government in maintaining a stable exchange rate.

Prerequisite Conceptual Understanding/Before the Classroom Discussion

The students/participants should be asked to read the following chapter to help them connect the concepts discussed in the case flyer:

  • • Paul A. Samuelson, et al., “Exchange Rates and the International Financial System”, Economics, 19th Edition (Special Indian Edition), McGraw Hill Education (India) Private Limited, 2014 – To understand the concepts of foreign exchange, exchange rates, Purchasing Power Parity (PPP), appreciation and depreciation of currency and devaluation of currency

 

Case Positioning and Setting

The case flyer can be used in MBA, Executive MBA or Executive Development Programs, for the following module/topic:

  • • Foreign Exchange Rates – To understand the concepts of foreign exchange, exchange rates and Purchasing Power Parity, appreciation, depreciation or devaluation of a currency and their effect on the economy, business and an individual consumer

 

 Preamble to the Case Flyer Analysis and Suggested Orchestration

This case flyer gives an understanding about the exchange rates of the currency, its determination, various types of exchange rates and the importance of Purchasing Power Parity in exchange rate dynamics. It also introduces the students/participants to the concepts of appreciation of currency, depreciation of currency and the difference between depreciation and devaluation of currency. Further, it helps understand the effects of appreciation and depreciation of currency on individual consumers, companies, exports and imports and the country. The analysis of the facts presented in the base article helps to determine the effect of depreciating rupee, Ceteris Paribus, on the holiday plans (and other consumables) of individual consumers and the reasons behind their decisions. This case flyer analysis was carried out as presented in Exhibit (TN)-I....................

Case Analysis and Discussion

I. Exchange Rates, PPP Theory and Depreciation and Devaluation of a Currency

The discussion can be started by knowing the participants’ understanding about the exchange rate, its types and regimes. Then, the subsequent questions in this section would help the participants to know more about the variations in the exchange rates (appreciation, depreciation and devaluation) and the factors affecting the same and about PPP.

1. What is exchange rate and how is it determined?

Exchange Rate is the price of one country’s currency measured in terms of another country’s currency.
It measures how much of one currency can be purchased with the other currency.

For instance, as on September 27th 2015, the Indian Rupee price of one US dollar was INR66.16, i.e., it took INR66.16 to purchase US$1.

Exchange rate determination depends on two factors – the demand of the currency and the supply of the currency.

Demand is a function of domestic resident’s need for foreign exchange to consummate intended overseas transactions.

Supply is a function of foreign residents need for US$ to consummate transaction in the US. This can be represented through a graph [Exhibit (TN)-II].

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Exhibits

Exhibit (TN)-I: Suggested Classroom Orchestration

Exhibit (TN)-II: Exchange Rate Determination: Demand and Supply

Exhibit (TN)-III: Depreciation vs Devaluation of Currency

Exhibit (TN)-IV: Devaluation based on Rate of Change

Exhibit (TN)-V: Devaluation Leads to Inflation

Exhibit (TN)-VI: Relationship between Inflation and Exchange Rates

Exhibit (TN)-VII: Effect of Rupee Appreciation and Depreciation

Exhibit (TN)-VIII: Effect of Rupee Devaluation

Exhibit (TN)-IX: Stable Exchange Rate – Role of Government

Exhibit (TN)-X: Effect of Appreciation and Depreciation on Stock Market Returns

Exhibit (TN)-XI: Effect of Appreciation and Depreciation on Industries

Exhibit (TN)-XII: Historical Exchange Rate – Rupee to US Dollar

Exhibit (TN)-XIII: Effect of Rupee Value on Indian Consumer

Exhibit (TN)-XIV: Effect of Appreciation and Depreciation of Rupee on Travel

Exhibit (TN)-XV: Effect on Indian Tourism and Education

Exhibit (TN)-XVI: Elasticity and Exchange Rate

$3.66
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Product code: ME-4-0020, ME-4-0020A

Abstract


This case flyer, based on the article1 from The Economic Times, is meant to sensitize participants/students as to how either appreciation or depreciation of a currency affects an individual consumer. With relevant and related concepts - Exchange Rates, Exchange Rate determination, Purchasing Power Parity (PPP)/Law Of One Price (LOOP) and devaluation of a currency - this case flyer can be used to explain how macroeconomic variables affect a microeconomic unit i.e., individual consumer. While depreciation of a currency can benefit a few quarters of economy, especially the exporters, the individuals working abroad on short-term assignments, those who are making remittances, etc., quite a few others like importers, expats residing in India and sending remittances abroad, etc., would be at a disadvantage. How does an individual consumer get affected with currency depreciation? Why do currencies depreciate and how do they affect economies?



Pedagogical Objectives

  • To understand the concepts of depreciation of a currency, exchange rate determination and the PPP theory in exchange rate determination
  • To illustrate and examine how depreciation of a currency affects an individual consumer, a company as well as a country
  • To discuss and debate on the differences and ramifications of depreciation of a currency and devaluation of a currency

Case Positioning and Setting
The case flyer can be used in MBA, Executive MBA or Executive Development Programs, for the following module/topic:

  • Foreign Exchange Rates - To understand the concepts of foreign exchange, exchange rates and purchasing power parity, appreciation, depreciation or devaluation of a currency and their effect on the economy, business and an individual consumer


1 "Rupee Dip Won’t Spoil Holiday Plans", The Economic Times Wealth, July 20th-26th 2015, page 16


This Case Pack Includes:
- Abstract
- Case Flyer
- Analysis


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