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Chapter Fourteen Globalization 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. Copyright © Houghton Mifflin Company.All rights reserved. 14–2 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. Copyright © Houghton Mifflin Company.All rights reserved. 14–3 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. Copyright © Houghton Mifflin Company.All rights reserved. 14–4 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. Copyright © Houghton Mifflin Company.All rights reserved. 14–5 Reading the Exchange Rate Tables Wall Street Journal: “currency trading” Country Britain (pound) U.S. $equiv. 1.6774 Currency per U.S. $ .5961 Germany(euro) .7936 1.26 Japan (yen) .0084 119 Turkey (lira) .00001169 25.290 Copyright © Houghton Mifflin Company.All rights reserved. 14–6 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 Copyright © Houghton Mifflin Company.All rights reserved. 14–7 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” Copyright © Houghton Mifflin Company.All rights reserved. 14–8 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 Per Capita Incom e 0 10,000 20,000 30,000 40,000 Industrial Nations: % Change in RGDP US Canada Japan France Germany UK Copyright © Houghton Mifflin Company.All rights reserved. 19 93 19 91 19 76 - -2 -3 19 89 0 -1 19 87 2 1 85 % Change RGCP 7 6 5 4 3 14–10 U.S. and LDCs: % Change RGDP 10 8 % Change RGDP US Africa Asia Mideast 6 4 2 19 93 19 91 19 89 19 76 - -2 19 87 85 0 “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?” Copyright © Houghton Mifflin Company.All rights reserved. 14–12 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? Copyright © Houghton Mifflin Company.All rights reserved. 14–13 Functioning in a Global Economy $/Euro D1 Quantity of euros Copyright © Houghton Mifflin Company.All rights reserved. 14–14 Functioning in a Global Economy $/Euro S D1 Quantity of euros Copyright © Houghton Mifflin Company.All rights reserved. 14–15 Functioning in a Global Economy $/Euro S D1 D2 Quantity of euros Copyright © Houghton Mifflin Company.All rights reserved. 14–16 Exchange Rate Systems: Fixed vs. Flexible What does this mean? Copyright © Houghton Mifflin Company.All rights reserved. 14–17 Exchange Rate Systems: Fixed vs. Flexible $/Euro S Fixed Exchange rate D1 D2 Quantity of euros Copyright © Houghton Mifflin Company.All rights reserved. 14–18 Exchange Rate Systems: Fixed vs. Flexible $/Euro S Fixed Exchange rate D1 D2 Quantity of euros Copyright © Houghton Mifflin Company.All rights reserved. 14–19 Exchange Rate Systems: Fixed vs. Flexible • If rates are fixed, then what are they fixed to? • Gold standard. • The government’s decision. Copyright © Houghton Mifflin Company.All rights reserved. 14–20 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? Copyright © Houghton Mifflin Company.All rights reserved. 14–21 Exchange Rate Systems $/Y S 1/7 1/8.3 Fixed Exchange rate D1 D2 Quantity of RMB Copyright © Houghton Mifflin Company.All rights reserved. 14–22 Too Low of a Value $/Y S 1/7 1/8.3 Fixed Exchange rate D2 Quantity of RMB Copyright © Houghton Mifflin Company.All rights reserved. 14–23 Too High of a Value $/Y 1/8.3 Fixed Exchange S rate 1/9 D1 Quantity of RMB Copyright © Houghton Mifflin Company.All rights reserved. 14–24 Demand • Consider the demand for Motorola cellular phones in the U.S: • The demand in each nation is converted to U.S. dollars. • What does this mean? • If the RMB/$ rate changes to 10RMB/$1 from the 8RMB/$1, then the demand for cellular phones (converted to dollars) will decline. Copyright © Houghton Mifflin Company.All rights reserved. 14–25 Functioning in a Global Economy Price in $ S D1 D2 Quantity of cellular phones Copyright © Houghton Mifflin Company.All rights reserved. 14–26 Supply • Consider 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. Copyright © Houghton Mifflin Company.All rights reserved. 14–27 Costs decline Price SRATC SRAC DEMAND Quantity MR Functioning in a Global Economy Price in $ S S2 D Quantity of cellular phones Copyright © Houghton Mifflin Company.All rights reserved. 14–29