Buisiness Implication of Exchange Rates

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BUSINESS IMPLICATIONS OF EXCHANGE-RATE CHANGES

BUSINESS IMPLICATIONS OF
EXCHANGE-RATE CHANGES
Market Decisions

On the marketing side, exchange rates can affect demand for a company’s products at home and abroad. A country such as Mexico may force down the value of its currency if its exports become too expensive owing to relatively high inflation. Even though inflation would cause the peso value of the Mexican products to rise, the devaluation means that it takes less foreign currency to buy the pesos, thus allowing the Mexican products to remain competitive. One interesting ramification of a peso depreciation is the impact of the cheaper Mexican goods on exporters from other countries. For example, the cheaper Mexican goods flooding the market in Argentina might take away market share from Italian exporters, thus affecting the Italian economy.

A good example of the marketing impact of exchange rate changes is the problem that Japanese car manufacturers were having selling to the United States in 1986 and 1987 due to the sharp rise in the value of the yen. As the dollar fell 47 percent against the yen in the 16 months ending in December 1986, Japanese car companies found that their cost advantage had disappeared, prices had to be increased, and profit margins had to be trimmed in order to remain competitive. In addition, Korean cars were making inroads due to the low costs and prices of Korean products. Thus a currency depreciation could result in foreign products becoming so expensive in a country like the United States that U.S. products soon would pick up market share from imports. The key is whether or not the percentage of devaluation exceeds the relative increase in inflation.

In the case of Japan, the strengthening of the Japanese yen in the latter part of 1990 was advantageous to the Japanese in one sense—the cost of imports. Oil prices skyrocketed in late 1990 as Iraq invaded Kuwait, and oil is priced in dollars. Because the yen was rising...
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