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Exchange-rate fluctuations and international competitiveness Comdemo is a hypothetical U.S. computer manufacturer. The following table shows Comdemos production costs of producing one computer. Note that Comdemo denominates the costs of its inputs in dollars as well as francs. Initially, in period 1, the exchange value of the dollar is $0.40 per franc. Complete the Period 1 section in the following table by calculating the franc equivalent of the input costs and Comdemos total cost of producing one computer. Cost of Producing One Computer Period 1: $0.40 per Franc Period 2: $0.50 per Franc Cost Equivalent Cost Equivalent (Dollar) (Franc) (Dollar) (Franc) Labor 160.00 400.00 160.00 320.00 Dollar-denominated inputs 120.00 300.00 120.00 Franc-denominated inputs 100.00 250.00 Energy cost 50.00 125.00 50.00 100.00 Total cost 430.00 Suppose that in period 2, the dollar depreciates to $0.50 per franc. Complete the Period 2 section in the previous table by calculating the franc equivalent of the dollar-denominated costs, the dollar cost of the francs-denominated costs, and the total costs for both currencies. Based on your calculations, the percentage change in total dollar costs of producing one computer is , whereas the percentage change in total franc costs is . Assume Comdemo competes with French producers. As a result of the dollar depreciation, Comdemos international competitiveness . Suppose Comdemo decides to denominate all of its inputs acquired domestically in dollars. Which of the following is the most likely outcome of this decision? Comdemos international competitiveness would improve even more. Comdemos international competitiveness would worsen even more. There would be no difference in Comdemos international competitiveness. Comdemos competitiveness would now worsen.

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