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

Chapter Fourteen

Globalization

Copyright © Houghton Mifflin Company.All rights reserved. 14–2

Exchange Rates

• H.J. Heinz’s 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 Rates

• The 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 Rates

• Now, 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 Rates

• At 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 Tables

Wall Street Journal: “currency trading”

Country U.S. $equiv.

Currency per U.S. $

Britain (pound) 1.6774 .5961

Germany(euro) .7936 1.26

Japan (yen) .0084 119

Turkey (lira) .00001169 25.290


Reading the Exchange Rate Tables

• On 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 Countries

• Less-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”

0 10,000 20,000 30,000 40,000

Per CapitaIncome

Ireland New Zealand Sisrael Spain Hong Kong Singapore Australia United Kingdom Italy Netherlands Canada Belgium Finland France Austria Germany United States Norway Denmark Sweden Japan Switzerland


-3

-2

-1

0

1

2

3

4

5

6

7

US

Canada

Japan

France

Germany

UK

Industrial Nations: % Change in RGDP

% C

hange RG

CP

-2

0

2

4

6

8

10

US

Africa

Asia

Mideast

U.S. and LDCs: % Change RGDP

% C

hange RG

DP


“Let’s Globalize”

• What 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


• 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?



$/Euro

Quantity of euros

D1


$/Euro

Quantity of euros

D1


S


$/Euro

Quantity of euros

D1

S


D2


Exchange Rate Systems: Fixed vs. Flexible

What does this mean?


$/Euro

Quantity of euros

D1

S

D2


Fixed Exchange

rate



$/Euro

Quantity of euros

D1

S

D2

Fixed Exchange

rate



• If rates are fixed, then what are they fixed to? • Gold standard.

• The government’s decision.


Exchange Rate Systems

• The exchange rate between the U.S. dollar and the Chinese currency, RMB, is fixed by the Chinese government at

• 8.3RMB = $1 where RMB represents the Chinese currency

• RMB = ____dollars?


D1

S

D2

Fixed Exchange

rate

Exchange Rate Systems

$/Y

Quantity of RMB

1/8.3

1/7


S

D2

Fixed Exchange

rate

$/Y

Quantity of RMB

1/8.3

1/7

Too Low of a Value


S

Fixed Exchange

rate

$/Y

Quantity of RMB

1/8.3

1/9

Too High of a Value

D1


Demand

• Consider the demand for Motorola cellular phones in the U.S:

• The demand in each nation is converted to U.S. dollars.


• If the RMB/$ rate changes to 10RMB/$1 from the 8RMB/$1, then the demand for cellular phones (converted to dollars) will decline.



Price in $

Quantity of cellular phones

S

D1

D2


Supply

• Consider the supply of Motorola Cellular phones in the U.S.

• The supply depends on the costs of producing phones in China.


• If the RMB/$ rate changes to 10RMB/$1 from the 8RMB/$1, then the costs to Motorola (converted to dollars) will decline.

DEMAND

SRATCPrice

Quantity

Costs decline

MR

SRAC



Price in $

Quantity of cellular phones

S

D

S2

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

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