International Economics Homework 3

Russia depends on oil export revenues for a substantial part of government finances. Oil is priced in dollars and international oil transactions take place using the dollar as the price and currency for payment. For example, if Russia sells oil to France on the spot market, France will pay in dollars or pay in euros based on the dollar-euro exchange rate. Either way Russia receives the current spot market price per barrel of oil based in dollars.

To balance its budget, Russia assumes the international price of oil will equal $100 and the Russian ruble exchange rate will equal 37 rubles per dollar. This means that Russia receives 3,700 rubles per barrel.

By November 2014, the price of a barrel of oil had fallen to $78, meaning that Russia faces a shortfall of $22 a barrel or 22%. At the same time the ruble had depreciated to 46 rubles per dollar.

1) Calculate the ruble revenue per barrel using a price of $78 per barrel and the exchange rate of 46 rubles per dollar.

2) What is the percentage decrease in revenues per barrel at the new price and exchange rate in comparison the base price ($100) and exchange rate (37=1)?