Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Phillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players?

Question

Quizplus · Accepted Answer

The degree of pass through is calculated as the percentage change in the price in the importing country divided by the percentage change in the exchange rate.

Percentage change in price in the importing country = [(new price - old price)/old price] x 100
= [(160-150)/150] x 100
= 6.67%

Percentage change in exchange rate = [(new rate - old rate)/old rate] x 100
= [(1.45-1.25)/1.25] x 100
= 16%

Degree of pass through = [percentage change in price in the importing country / percentage change in exchange rate] x 100
= [6.67 / 16] x 100
= 41.7%

Therefore, the answer is C (41.7%).

Phillips NV Produces DVD Players and Exports Them to the United