chapter fourteen globalization. copyright © houghton mifflin company.all rights reserved. 14–2...

Download Chapter Fourteen Globalization. Copyright © Houghton Mifflin Company.All rights reserved. 14–2 Exchange Rates H.J. Heinz’s annual report: “We were hurt

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  • Chapter FourteenGlobalization

  • Exchange RatesH.J. Heinzs annual report: We were hurt by unexpected exchange rate changes. What does this mean?Suppose the price elasticity of demand for catsup is 2.5.Suppose that Heinz sells catsup in the U.S. and U.K.

  • Exchange RatesThe exchange rate of pounds to dollars is .6. It takes .6 pounds to buy $1; or it takes $1.6 to buy 1 pound.

  • Exchange RatesNow, what occurs if the exchange rate changes to $1.4 to 1 pound?Without anything else changing, the price of catsup in the U.K. rises. If the price was $2 per bottle in the U.S., it would be .6 x 2 = 1.2 pounds in the U.K.

  • Exchange RatesAt the new exchange rate, the $2 in the U.S. would be 1/1.4 x 2 = 1.44 pounds.Thus, the price has risen by .24 pounds without any changes on the part of Heinz.

  • Reading the Exchange Rate TablesWall Street Journal: currency trading

    CountryU.S. $equiv.Currency per U.S. $Britain (pound)1.6774.5961Germany(euro).79361.26Japan (yen).0084119Turkey (lira).0000116925.290

  • Reading the Exchange Rate TablesOn this date, the U.K. pound was selling for $1.67. The same day, the U.S. dollar was selling for .59 pounds.If you know the price in U.S. dollars of a currency, you can find the price of the U.S. dollar in that currency by taking the reciprocal; 1.67 = 1/.59

  • Types of CountriesLess-developed countries (LDCs) have per-capita incomes of less than $610, and middle incomes of $611-$7619.High incomes exceed $7620.LDCs are often called emerging markets

  • Industrial Nations: % Change in RGDP% Change RGCP

  • U.S. and LDCs: % Change RGDP% Change RGDP

  • Lets GlobalizeWhat does this mean?Selling our product in other countries.Locating in other countries.Purchasing products or supplies from firms located in other countries.What is difference between global and multi-domestic?

  • Functioning in a Global Economy What does this mean?It means that it is necessary to be concerned with the rest of the world -- with exchange rates in particular.How are exchange rates determined?

  • Functioning in a Global Economy$/EuroQuantity of eurosD1

  • Functioning in a Global Economy$/EuroQuantity of eurosD1S

  • Functioning in a Global Economy$/EuroQuantity of eurosD1SD2

  • Exchange Rate Systems: Fixed vs. FlexibleWhat does this mean?

  • Exchange Rate Systems: Fixed vs. Flexible$/EuroQuantity of eurosD1SD2Fixed Exchangerate

  • Exchange Rate Systems: Fixed vs. Flexible$/EuroQuantity of eurosD1SD2Fixed Exchangerate

  • Exchange Rate Systems: Fixed vs. FlexibleIf rates are fixed, then what are they fixed to? Gold standard.The governments decision.

  • Exchange Rate SystemsThe exchange rate between the U.S. dollar and the Chinese currency, RMB, is fixed by the Chinese government at8.3RMB = $1 where RMB represents the Chinese currency RMB = ____dollars?

  • Exchange Rate SystemsD1SD2Fixed Exchangerate$/YQuantity of RMB1/8.31/7

  • Too Low of a ValueSD2Fixed Exchangerate$/YQuantity of RMB1/8.31/7

  • Too High of a ValueSFixed Exchangerate$/YQuantity of RMB1/8.31/9D1

  • DemandConsider the demand for Motorola cellular phones in the U.S:The demand in each nation is converted to U.S. dollars.What does this mean?If the RMB/$ rate changes to 10RMB/$1 from the 8RMB/$1, then the demand for cellular phones (converted to dollars) will decline.

  • Functioning in a Global EconomyPrice in $Quantity of cellular phonesSD1D2

  • SupplyConsider the supply of Motorola Cellular phones in the U.S.The supply depends on the costs of producing phones in China. What does this mean?If the RMB/$ rate changes to 10RMB/$1 from the 8RMB/$1, then the costs to Motorola (converted to dollars) will decline.

  • DEMANDSRATCPriceQuantityCosts declineMRSRAC

  • Functioning in a Global EconomyPrice in $Quantity of cellular phonesSDS2