Download GLOBALIZATION

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.
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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.
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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.
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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.
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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
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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
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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”
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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
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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?”
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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?
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14–13
Functioning in a Global Economy
$/Euro
D1
Quantity of euros
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14–14
Functioning in a Global Economy
$/Euro
S
D1
Quantity of euros
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14–15
Functioning in a Global Economy
$/Euro
S
D1
D2
Quantity of euros
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14–16
Exchange Rate Systems:
Fixed vs. Flexible
What does this mean?
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14–17
Exchange Rate Systems:
Fixed vs. Flexible
$/Euro
S
Fixed
Exchange
rate
D1
D2
Quantity of euros
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14–18
Exchange Rate Systems:
Fixed vs. Flexible
$/Euro
S
Fixed
Exchange
rate
D1
D2
Quantity of euros
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14–19
Exchange Rate Systems:
Fixed vs. Flexible
• If rates are fixed, then what are they
fixed to?
• Gold standard.
• The government’s decision.
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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?
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14–21
Exchange Rate Systems
$/Y
S
1/7
1/8.3
Fixed
Exchange
rate
D1
D2
Quantity of RMB
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14–22
Too Low of a Value
$/Y
S
1/7
1/8.3
Fixed
Exchange
rate
D2
Quantity of RMB
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14–23
Too High of a Value
$/Y
1/8.3
Fixed
Exchange
S
rate
1/9
D1
Quantity of RMB
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14–24
Demand
• Consider the demand for Motorola cellular
phones in the U.S:
• The demand in each nation is converted to
U.S. dollars.
• What does this mean?
• If the RMB/$ rate changes to 10RMB/$1 from
the 8RMB/$1, then the demand for cellular
phones (converted to dollars) will decline.
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14–25
Functioning in a Global Economy
Price
in $
S
D1
D2
Quantity of cellular phones
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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.
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14–27
Costs decline
Price
SRATC
SRAC
DEMAND
Quantity
MR
Functioning in a Global Economy
Price
in $
S
S2
D
Quantity of cellular phones
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14–29