Question

An American company wants to buy a television from a Chinese company. The Chinese company sells its TVs for 1,200 yuan each. The current exchange rate between the U.S. dollar and the Chinese yuan is \(\$ 1=6\) yuan. How many dollars will the American company have to convert into yuan to pay for the television? \(L O 39.1\) a. \(\$ 7,200\) b. \(\$ 1,200\) c. \(\$ 200\) d. \(\$ 100\)

Short answer

The American company needs \(\$ 200\) to buy the television.

Step-by-step solution

Understand the Exchange Rate

The exchange rate given is \(1\) U.S. dollar equals \(6\) Chinese yuan. This means to convert yuan to U.S. dollars, you divide the amount in yuan by \(6\).

Identify the Cost in Yuan

The price of the television is \(1,200\) yuan. This is the amount the American company needs to convert to dollars.

Convert Yuan to Dollars

To find out how many dollars are needed to pay \(1,200\) yuan, divide \(1,200\) by the exchange rate, which is \(6\). \[ \text{Dollars} = \frac{1,200}{6} = 200 \]

Choose the Correct Option

The calculation shows that \(200\) U.S. dollars are needed. Correspondingly, the correct choice is option c, which is \(\$ 200\).

Key concepts

Currency Conversion

Currency conversion is a crucial process in international finance and trade. It involves changing one currency into another to facilitate transactions across different countries. For instance, if a company in the United States wants to purchase items from a manufacturer in China, it needs to convert its U.S. dollars into Chinese yuan to make the payment.

The conversion hinges upon the exchange rate, which determines how much one currency is worth in terms of another. In our example, the exchange rate is given as 1 U.S. dollar equals 6 Chinese yuan. This means for every dollar, you can get 6 yuan.

To convert the amount, you apply a straightforward calculation based on the exchange rate. If an American company needs to pay 1,200 yuan, it would divide 1,200 by 6, resulting in 200 dollars. Thus, currency conversion allows businesses to accurately determine how much money is needed in a foreign currency.

International Trade

International trade involves the exchange of goods and services between countries. This process enables nations to obtain products that may not be available within their borders or are cheaper to import than to produce locally.

Trade between countries is facilitated through contracts that require careful financial planning, especially regarding currency differences. Using currency conversion, companies can manage these financial transactions, ensuring they are properly funded to purchase goods from another country.

• Increased access to different goods.
• Cost benefits from purchasing from abroad.
• Economic growth through varied trade relationships.

International trade relies heavily on currency conversion to ensure payments are made correctly, allowing global businesses to thrive.

Foreign Exchange Markets

Foreign exchange markets, also known as Forex or FX markets, play a pivotal role in currency conversion. They determine the exchange rates used for converting one currency into another. These markets are global, decentralized platforms where currencies are traded continuously during the week.

The exchange rate between the U.S. dollar and Chinese yuan in our example is set by these foreign exchange markets. They fluctuate based on economic indicators, geopolitical events, and trade balances, among other factors. This constant fluctuation means that exchange rates can vary, affecting the cost of trade between countries.

• The largest financial market globally by trading volume.
• Affects currency value through demand and supply dynamics.
• Provides stability through liquidity.

Understanding the foreign exchange markets is essential for businesses engaged in international transactions, as it impacts their costs and profit margins.