Currently, Blades follows a policy of invoicing in Thai baht ( Thailands currency). Ben Holt felt that this strategy would give Blades a competitive advantage since Thai importers can plan more easily when they do not have to worry about paying differing amounts due to currency fluctuations. Furthermore, Blades primary customer in Thailand ( a retail store) has committed itself to purchasing a certain amount of Speedos annually if Blades will invoice in baht for a period of 3 years. Blades purchases of components from Thai exporters are currently invoiced in Thai baht. Ben Holt is rather content with current arrangements and believes the lack of competitors in Thailand, the quality of Blades products, and its approach to pricing will ensure Blades position in the Thai roller blade market in the future.
Holt also feels that Thai in the Thai roller blade market in the future. Holt also feels that Thai importers will prefer Blades over its competitors because Blades invoices in Thai baht. You, Blades financial analyst, have doubts as to Blades guaranteed future success. Although you believe Blades strategy for its Thai sales and imports are sound, you are concerned about current expectations for the Thai economy. Current forecasts indicate a high level of anticipated inflation, a decreasing level of national income, and a continued depreciation of the Thai baht.
In your opinion, all of these future developments could affect Blades financially given the companys current arrangements with its suppliers and with the Thai importers. Both Thai consumers and firms might adjust their spending habits should certain developments occur. In the past, you have had difficulty convincing Ben Holt that problems could arise in Thailand. Consequently, you have developed a list of questions for yourself, which you plan to present to the companys CFO after you have answered them. Your questions are listed here:
1. How could a higher level of inflation in Thailand than that of US affect Blades import and export respectively in the following two scenarios?
a. In the short term, US$ versus THB hold at fixed exchange rate due to a pegged exchange rate policy.
b. In the long run, the Thailand trade deficit causes the pegged exchange