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INTRODUCTION

Carlos is a senior at local high school. When he graduates, he plans to study computer animation. He has applied to a number of two-year programs, and recently, he received letters of acceptance from four schools, one in the United States and three abroad. Carlos has funding from several sources, providing him with a $5,000 scholarship to be used at the school of his choice, a student loan of $5,000, and $6,000 of personal savings.

Your job is to evaluate the options that will allow Carlos to complete a 2-year computer animation program, given the $16,000 of funding. The real issue for Carlos to consider is what he can afford. Listed below are the four schools to which Carlos has been accepted, including the package of options and expenses for each.

TASK

In this lesson you will describe the role of foreign currency in transactions in other countries. You will also use exchange rates to calculate the dollar-equivalent cost of tuition in another country, take account of changes in exchange rates between currencies over time, and analyze the incentive effects of exchange rates as they affect purchases of foreign foods and services.

PROCESS

Cost per year to complete a two-year program in computer animation

The Tokyo Technical Institute

Tuition: 750,000 yen
Room & Board: 250,000 yen
TTI scholarship: 129,000 yen

The London School of Technology

Tuition: 3,600 pounds
Room & Board: 1200 pounds
LFS scholarship: 600 pounds

The University of Helsinki

Tuition: 29,810 markka
Room & Board: 12,466 markka
UH scholarship: 10,840 markka

University of California at Los Angeles

Tuition: 5,000 dollars
Room & Board: 4,000 dollars
UCLA scholarship: 3,000 dollars

Activity 1

Exchange Rates
Whoa! What isa yen, a markka, and a pound? In the United States our currency is the dollar; in Japan, the United Kingdom, and Finland, the currencies are the yen, the pound, and the markka. So, what exactly is currency? People use currency, in the form of coins and bills, as payment for goods and services. What forms do United States currency take? Each individual country has its own currency that is accepted as payment for goods and services. Is it possible that all currencies are worth the same amount? Tuition in Tokyo is 580,500 yen, in London it is 3,000 pounds, and in Helsinki, it is 29,810 markka. These amounts clearly differ from the $5,000 cost of tuition at UCLA. Carlos must figure out a way to compare the tuition prices listed at each school in order to make a decision.

Fortunately, there is a system in place that allows the currency of one country to be exchanged for the currency of another. This system is the currency exchange market and it provides the prices of one currency in terms of another. For example, let's price the currencies of Japan, the United Kingdom, and Finland in terms of how much of each a single dollar will buy.

$1 =

 129

.

0

 yen

$1 =

 

.

6

 pounds

$1 =

5

.

42

 markka

These exchange rates will help Carlos compare the costs between schools. With the calculator below and simple proportion, we can calculate the dollar cost of tuition at the Tokyo Technical Institute. Tuition is 580,500 yen, and we know 1 dollar = 129 yen. As a proportion, we write 1 over 129 equals n dollars over 580,500 yen.

1 dollar

=

n dollars

129 yen

580,500 yen

 

If you remember back to your basic math class, you can solve a proportion like this by multiplying the cross products and dividing.

EconEdLink Calculator


As a result, 1 multiplied by 580,500 = n multiplied by 129. To solve for n, divide both sides of the equal sign by 129 and we find that n = 4,500. What this tells us is that tuition of 580,500 yen is equivalent to $4,500. How does this compare to the tuition at UCLA? Based on the exchange rates listed above, convert the costs and scholarship at each school into dollar amounts.

A.  The Tokyo Technical Institute

Tuition: 750,000 yen
Room & Board: 275,000 yen
TTI scholarship: 129,000 yen

Tuition Costs

1 dollar

=

n dollars

$____________________

129 yen

750,000 yen

 

1. Room and Board Costs =

1 dollar

=

n dollars

$____________________

129 yen

258,000 yen

 

2. TTI scholarship =

1 dollar

=

n dollars

$____________________

129 yen

129,000 yen

3. Dollar cost of attending school in Tokyo _____________


B.  The London Film School

Tuition: 3,600 pounds
Room & Board: 1200 pounds
LFS scholarship: 600 pounds

4. Tuition cost =

1 dollar

=

n dollars

$____________________

.6 pounds

3600 pounds

 

5. Room and Board costs=

1 dollar

=

n dollars

$____________________

.6 pounds

1200 pounds

 

6. LFS scholarship =

1 dollar

=

n dollars

$____________________

.6 pounds

600 pounds


7. Dollar cost of attending school in London ____________________


C.  The University of Helsinki

Tuition: 29,810 markka
Room & Board: 12,466 markka
UH scholarship: 10,840 markka

8. Tuition cost =

1 dollar

=

n dollars

$____________________

5.4 markka

29,810 markka

 

9. Room & Board cost =

1 dollar

=

n dollars

$____________________

5.4 markka

12,466 markka

 

10. UH scholarship =

1 dollar

=

n dollars

$____________________

5.4 markka

10,840 markka


11. Dollar cost of attending school in Helsinki.


12. List the dollar cost of each school in the space below:

Tokyo

London

Helsinki

Los Angeles

$_______

$_______

$_______

$_______



13. Based on the dollar costs above, which schools can Carlos afford to attend?

14. What other additional costs should Carlos consider when making his decision?

Activity 2

Changes in Rate of Exchange

Carlos was surprised the other day when his friend Janet asked him how the movement in exchange rates might affect his cost of attending school outside of the United States. Carlos had to admit he didn’t know exchange rates fluctuated. Janet told him that rates of exchange actually change on a daily basis and that he should check out current rates on the Internet. Click here to find the current dollar rates of exchange for the yen, pound, and markka.

1. Record the current exchange rates for the yen, pound, and markka.

Original Exchange Rate

Current Exchange Rate

$1 = 129 yen

$1 = _____ yen

$1 = .6 pounds

$1 = _____ pounds

$1 = 5.42 markka

$1 = _____ markka


2. In comparison with the original rates of exchange, does the dollar buy more or less of each of the other currencies?
$1 buys _____ yen
$1 buys _____ pounds
$1 = _____markka

Janet also told Carlos that when the dollar buys fewer yen, people say the dollar has depreciated against the yen; when it buys a greater number of pounds or markka, we say the dollar has appreciated against the pound and the markka. How do you think these shifts in exchange rates will affect Carlos’s cost to attend school outside of the United States?

3. Utilize the exchange rate converter to recalculate the dollar cost of each school based on the current exchange rates .

Tokyo

London

Helsinki

Los Angeles

$_______

$_______

$_______

$_______


4. What conclusion would you make about the cost of attending school abroad when the dollar appreciates against a foreign currency?


5. What conclusion would you make about the cost of attending school abroad when the dollar depreciates against a foreign currency?

Activity 3

Study Option Summary

Select one of the foreign study options and prepare a written summary that will help Carlos make a decision about which school to attend. The summary should include the following items:

  1. Name of the school, its location, and cost to attend two years at the current rate of exchange.

  2. Price of a round-trip air fare .

  3. Photo of the currency
    Yen
    Pound
    Marrka

  4. Historical exchange rates. Record and graph five rates of exchange, from two years ago to the current date, one year ago, six months ago, three months ago, one month ago, and the currency rate. At the following web site , enter in the date box the day, month, and year for two years ago. As an example, if today is Feb 10, 2000, enter 02/10/00. In the second country drop-down box, select the country on which you are writing the brief and then click ‘convert now’. Follow the same process to locate the other rates.

    Once you have the five rates of exchange, setup a simple graph with the dates on the horizontal axis and the exchange rate per dollar on the vertical axis.

Activity 4

The Decision

  1. Group students by the foreign study option they selected. Ask each group to review and compare their summaries in preparation for a class discussion.

  2. On the board, record the cost information for the University of California option. Ask a representative from each group to also record their cost information on the board, in current dollars. Discuss the following questions:

    1. Based on current exchange rates, which schools are too expensive, given Carlos’s budget of $16,000.

    2. Based on current exchange rates, which schools can Carlos afford?

    3. Based on the historical exchange rate information, is the dollar appreciating or depreciating against the yen? If Carlos is scheduled to graduate in the Spring of 2000, does it look as if the dollar will recover enough to make Tokyo an affordable option?

    4. Based on the historical exchange rate information, is the dollar appreciating or depreciating against the pound and the marrka? What implication does the appreciation of the dollar have in terms of the cost of Carlos attending school London or Helsinki?

    5. What other information would be useful in helping Carlos make a decision about which school to attend?

    6. Exchange rates are an important factor to consider when buying goods or services in a foreign country. In the case of Carlos, the rate of exchange significantly affected his decision on where to attend school.

    7. Based on the costs associated with each school and Carlos’s budget, which school would you recommend he attend?