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CHAPTER 36 -- Part 1: INTERNATIONAL FINANCE
You should know LO1 after reading this chapter.
Exchange rates are established.
Exchange rates affect prices, output, and trade flows.
U.S. textile, furniture, and shrimp producers want China to increase the value of the renminbi.
The United States exports and imports a huge amount of goods and services.
We don't give much thought to where our imports come from or how we acquire them.
Most of the time, we just want to know which products are available and the price.
You might want to buy a DVD player.
You don't have to know that the players are produced by a Dutch company.
You don't have to go to the Netherlands to pick it up.
You can either drive to the nearest electronics store or click and buy at the Internet's virtual mall.
You may wonder how easy it was to purchase an imported product.
Dutch companies sell their products in euros.
The DVD player is purchased in dollars.
There's a chain of distribution between your dollar purchase in the US and the euro purchase in the Netherlands.
Someone has to convert your dollars into euros.
The exchange rate is 2 euros 1 dollar if we can get two euros one country's currency.
The price of a euro is 50 U.S. cents when the exchange rate is 2 to 1.
Foreign-exchange markets determine most exchange rates.
Money is a useful commodity that facilitates market exchanges if you stop thinking of it as a magical substance.
The price of money is subject to the same influences that determine demand and supply.
In 2006 it paid $5.4 billion for Westinghouse Electric Co.
The foreign investor's goal was to acquire an American business.
Japanese buyers had to exchange their currency for American dollars.
American dollars are needed by Canadian tourists.
Canadian currency is used to pay for goods and services in the U.S.
Canadian tourists need to buy American dollars if they want to watch the United Topic Podcast: States.
Europeans love iPods.
The Apple Corporation wants to be paid in U.S. dollars.
If you want an iPod, you need to exchange your euros for U.S. dollars.
Consumers can buy electronics at their local store.
When Apple Corporation gets paid in U.S. dollars, they will end a series of market transactions.
Foreign investors buy U.S. dollars for speculative purposes.
Russians preferred to hold U.S. dollars when the value of the ruble fell.
When it fears that the value of the British pound will fall, the bank speculates in dollars.
There is a demand for U.S. dollars.
Take a trip to Mexico.
At some point, you will need to buy Mexican pesos.
U.S. dollars are supplied when Americans buy BMW cars.
Consumers in the US pay for their cars in dollars.
Down the road, those dollars will be exchanged for European euros.
Corporations in the US demand foreign exchange.
General Motor builds cars in Germany, Coca-Cola makes coke in China, and Exxon refines oil all over the world.
In almost every case, the U.S. firm must first build or buy equipment in another country.
This activity requires foreign currency, which is another component of our demand for foreign currency.
Government intervention can contribute to the supply of dollars.
In international transactions, the price tag isn't always apparent.
If the BMW company sells a German-built BMW for 100,000 euros, the current exchange rate is 2 euros $1, and the dollar price is $1.
At current exchange rates, you may be able to get a shiny new German-built BMW for less than this price.
If the exchange rate goes from 2 euros $1 to 1 euro $1, it will be a change.
The dollar price of a euro increases from $0.50 to $1.
Germany is willing to sell BMWs for 100,000 euros.
Europeans continue to buy BMWs at that price.
The cost of a BMW is $100,000.
The number of BMWs sold in the United States will decline as the dollar increases.
The quantity of euros demanded may decline as BMW sales decline.
When the exchange rate increases, foreign goods become more expensive and imports decline.
When the dollar price of European currencies actually increased in 1992, BMW decided to start making cars in South Carolina.
Mercedes-Benz decided to make cars in the US a year later.
The supply of dollars is upwardsloping according to the market responses.
Americans will be able to buy more euros if the dollar's value goes up.
The dollar price of imported BMWs will decline.
American consumers will demand more imports in order to supply a larger quantity of dollars.
As the value of the dollar increases, the quantity of dollars supplied increases.
Similar terms can be used to explain the demand for dollars.
All American exports fall in price as dollars become cheaper for Germans.
Germans will buy more American products and therefore demand more dollars.
Foreign investors will see a cheaper dollar as an opportunity to buy U.S. stocks, businesses, and property.
They joined foreign consumers in demanding more dollars.
Over a brief period of time, these behavioral responses are reasonably predictable.
The two curves cross in Figure 36.1 The value of a good of the dollar is established at that equilibrium.
In this case, the euro price of the dollar is demanded in a certain amount of time.
The dollar's value can be expressed in other currencies.
In March 2007, World View displays a sampling of dollar exchange rates.
When the dollar's foreign-exchange price is above recent averages, it's high, and when it's below recent averages, it's low.
One unit of foreign currency is needed to buy one U.S. dollar.
Supply and demand in foreign-exchange markets determine the exchange rates.
The equilibrium exchange rates are reported here.
An accounting statement of all international money flows in a given record of a country.
The table shows the U.S. balance of payments.
The millions of separate transactions are classified into a few summary measures.
The trade balance is the difference between exports and imports.
The United States imported more goods and services in 2006 than it exported.
The trade gap created an excess supply of dollars.
Table 36.1 shows the current-account balance.
Government grants and private transfers include wages sent home by foreign citizens working in the United States, as well as merchandise, services, and investment balances.
Our trade relations are summarized in the current-account balance.
In 2006 the United States had a current-account deficit of $856 billion.
In 2006 foreign consumers demanded over 1.5 trillion dollars to buy farms and factories as well as U.S. bonds, stocks, and other investments.
This was more than the flow of U.S. dollars going overseas to purchase foreign assets.
The United States and foreign governments created an additional outflow of dollars by buying and selling dollars.
The US trade deficit was financed by the net capital inflows.
The number of dollars demanded and the number of dollars supplied are the same thing.
There can't be any money left that isn't accounted for.
The accounting system isn't perfect and we can't identify every transaction.
The quantity of dollars demanded is the same as the amount of dollars supplied.
The interesting thing about markets is that prices and quantities are always changing in response to shifts in demand and supply.
When Japan introduced a new line of sleek, competitively priced cars, the U.S. demand for BMWs shifted.
The American demand for German cars fell when the Japanese introduced luxury autos in the United States.
The dollar's value vis-a-vis the euro was raised by the supply shift.
One currency must appreciate another currency when it depreciates.
The euro price of a dollar fell and the dollar price of a euro rose when the exchange rate changed.
The exchange rate of the U.S. dollar has changed since 1980.
Weighted average of all exchange rates for the dollar is the trade-adjusted value of the U.S. dollar.
The U.S. dollar appreciated between 1980 and 1985.
The dollar appreciation raised the foreign price of U.S. exports and reduced the volume of exported goods.
Find out about the losses.
The trade deficit grew.
The dollar's value changed after 1985.
The dollar began to appreciate again, slowing export growth and increasing imports throughout the 1990s.
The dollar lost value in 2003 after a long appreciation.
It was good for U.S. exporters, but bad for U.S. tourists and foreign producers.
The euro's strength against the dollar has brought overseas customers to Al Lubrano's small Rhode Island bat manufacturing firm that he hasn't heard from in five years.
The estimate of busi board printing equipment and industrial valves to Europe by companies that rely on tourists and visitors is down 20% to 30%.
Farshad Sha, owner of Florence Moon, a leather store in Rome that caters to Lincoln, R.I., says his export business is down 50% this year.
"If it's bad for us, then the weak dollar must be bad for everyone else as well," Shahabadi says.
Lubrano said so.
Excerpted with permission.
Permission was granted for this article to be reproduced.
Depreciation of a nation's currency can be good for its exporters but bad for its importers.
Consumers in A will spend more if incomes are increasing faster than in B, which will increase demand for B's exports and currency.
B's currency will appreciate.
Consumers will look for cheaper imports if domestic prices rise rapidly.
The demand for B's exports will increase.
B's currency will appreciate.
If country A experiences a disastrous wheat crop, it will have to increase its food imports.
B's currency will appreciate.
People in country B will want to move their deposits to A if interest rates go up.
Demand for A's currency will increase.
If speculators anticipate an increase in the price of A's currency, they will begin buying it, thus pushing its price up.
A's currency will appreciate.
There are places where foreign currency is sold.
Currency values change only when bought and sold.
The Asian crisis of 1997-98 was caused by this.
The dollar prices of the baht went down.
Thais couldn't afford to buy as many American products.
Other Asian currencies were affected by the devaluation of the baht.
People wanted to hold the U.S. dollar.
People rushed to buy something.
The value of the local currency plunged when the latest exchange rates dollars with it.
Indonesians were no longer able to afford imported rice, machinery, cars, or pork.
Indonesian students in the U.S. couldn't afford to pay tuition.
Street demonstrations and a change in government were caused by the sudden surge in prices and scarcity of goods.
There were similar problems in Southeast Asia.
The "Asian contagion" was not limited to that area of the world.
Foreign demand for pork waned in the United States.
Koreans stopped taking vacations.
Boeing jets orders were canceled by Thai Airways.
Washington state apples and California oranges were less popular with Japanese consumers.
Economic growth in the United States, Europe, Japan, and other nations was slowed by the loss of export markets.
A solid basis for forecasting future costs, prices, and profits is what people who trade or invest in world markets want.
When the value of money changes, forecasts are even less reliable.
An American firm that invests $2 million in a ski factory in Sweden expects to make a profit and return that profit to the US.
The recipients of the science awards are Becker, Marcus, and Charpak, and they all said that the honor is more important than the money.
Gary Becker, a University of Chicago professor and a winner of the economics prize, said that if they had been more intelligent, they would have done some hedging.
They were given permission to be re-released with permission of $958,000.
Domestic income and assets are affected by currency depreciation.
The dollar value of the prize was affected by the Swedish krona's depreciation.
When the krona depreciates, the prize loses some of its luster.
The uncertainty associated with exchange rates is an unwanted burden.
When the direction of an exchange rate move is certain, those who stand to lose are prone to resist.
A change in the price of a country's money affects its exports and imports.
The dollar price of Russian and Japanese steel declined when the Russian ruble and Japanese yen depreciated.
The U.S. steelmakers accused Russia and Japan of dumping steel.
They appealed to Washington to protect their jobs.
There will be opposition to exchangerate movements even if the currency becomes cheaper.
Americans buy more foreign products when the U.S. dollar appreciates.
Increased U.S. demand for imports may lead to higher prices in other countries.
Foreign firms may raise their prices to take advantage of the reduced American competition.
Inflation will result in either case.
The consumer's insistence that the government do something about rising prices may turn into a political force for "correcting" foreign-exchange rates.
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