Currency Depreciation Exchange Rate Adjustments and the Balance Discussion

Description

In a critical essay, analyze how currency depreciation stimulates exports. Evaluate the three major approaches to analyzing the economic impact of currency depreciation: the elasticities approach, the absorption approach, and the monetary approach. Compare and contrast the three approaches and provide examples that distinguish them from each other.Directions:_Your essay is required to be five to six pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles. Use the Saudi Digital Library to find your resources.Use Saudi Electronic University academic writing standards and follow APA style guidelines.It is strongly encouraged that you submit all assignments into Turnitin prior to submitting them to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin—Student Guide for step-by-step instructions.Review the grading rubric to see how you will be graded for this assignment.For Your SuccessThe module emphasizes the elasticity approach to depreciation. A currency depreciation can lead to an improvement in a nation’s trade position. Consider this question as you progress through the module: Under what circumstances this could happen? Pay attention to the J-curve effect and the extent to which exchange rate changes lead to changes in import prices and export prices.This week, you have a Critical Thinking Assignment that is due. Please review the assignment directions now, and contact your instructor with any questions. Additionally, your next quiz encompassing material from Modules 11 and 12, which is a graded exercise for this module, must be completed by the end of this weekLearning OutcomesAnalyze how the exchange rate adjustments affect the balance of payments.Evaluate how currency depreciation stimulates exports.ReadingsRequired:Chapter 13 in International EconomicsSule, I., & Shuaibu, M. (2020). Current account behavior, real exchange rate adjustment and relative output in Nigeria. Journal of Economic Development, 45(3), 77-99. Recommended: Chapter 13 PowerPoint slides Chapter 13 PowerPoint slides – Alternative Formats – International EconomicsRappeti, M. (2020). The real exchange rate and economic growth: a survey. Journal of Globalization and Development, 11(1).https://doi-org.sdl.idm.oclc.org/10.1515/jgd-2019-0024

3 attachmentsSlide 1 of 3attachment_1attachment_1attachment_2attachment_2attachment_3attachment_3.slider-slide > img { width: 100%; display: block; }
.slider-slide > img:focus { margin: auto; }

Unformatted Attachment Preview

INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 13
ExchangeRate
Adjustments
and the
Balance of
Payments
© 2019 Cengage. All rights reserved.
2
Chapter Outline (1 of 2)
Effects of Exchange-Rate Changes on
Costs and Prices
Cost-Cutting Strategies of Manufacturers in
Response to Currency Appreciation
Will Currency Depreciation Reduce a Trade
Deficit? The Elasticity Approach
J-Curve Effect: Time Path of Depreciation
Exchange Rate Pass-Through
© 2019 Cengage. All rights reserved.
3
Chapter Outline (2 of 2)
The Absorption Approach to Currency
Depreciation
The Monetary Approach to Currency
Depreciation
© 2019 Cengage. All rights reserved.
4
Effects of Exchange-Rate Changes
on Costs and Prices (1 of 10)
How do exchange-rate fluctuations affect
relative costs?
• Depends on whether firm’s costs are
denominated in home or foreign currency
Case 1: No foreign sourcing?all costs
denominated in dollars
• If the dollar appreciates by 100%, the U.S.
firm’s production costs also rise by 100%
• Reduced international competitiveness
© 2019 Cengage. All rights reserved.
5
Effects of Exchange-Rate Changes
on Costs and Prices (2 of 10)
TABLE 13.1 Effects of a Dollar Appreciation on a U.S. Steel Firm’s
Production Costs When All Costs Are Dollar Denominated
COST OF PRODUCING A TON OF STEEL
PERIOD 1 $0.50 PER FRANC
(2 FRANCS = $1)
Dollar Cost
Labor
$160
Franc Equivalent
320 francs
PERIOD 2 $0.25 PER FRANC
(4 FRANCS = $1)
Dollar Cost
$160
Franc Equivalent
640 francs
Materials (iron/coal)
300
600
300
1,200
Other costs (energy)
40
80
40
160
Total
Percentage change
$500
1,000 francs
$500
—
—
—
© 2019 Cengage. All rights reserved.
2,000 francs
100%
6
Effects of Exchange-Rate Changes
on Costs and Prices (3 of 10)
• Case 2: Foreign sourcing—some costs
denominated in dollars and some in francs
• If dollar appreciates by 100%, for U.S. firm:
• Production costs in francs increase by 100% for
inputs denominated in dollars
• Production costs in francs stay the same for inputs
denominated in francs
• Overall, production costs are higher (by less than
100%)
• International competitiveness is reduced
© 2019 Cengage. All rights reserved.
7
Effects of Exchange-Rate Changes
on Costs and Prices (4 of 10)
TABLE 13.2 Effects of a Dollar Appreciation on a U.S. Steel Firm’s Production Costs
When Some Costs Are Dollar Denominated and Other Costs Are Franc Denominated
COST OF PRODUCING A TON OF STEEL
PERIOD 1 $0.50 PER FRANC
(2 FRANCS = $1)
Labor
Materials
$ denominated
(iron/coal)
Franc denominated
(scrap iron)
Total
Other costs (energy)
Total cost
Percentage change
Dollar Cost
$160
Franc Equivalent
320 francs
PERIOD 2 $0.25 PER FRANC
(4 FRANCS = $1)
Dollar Cost
$160
Franc Equivalent
640 francs
120
240
120
480
180
360
90
360
300
40
$500
—
600
80
1,000 francs
—
© 2019 Cengage. All rights reserved.
210
40
$410
?18%
840
160
1,640 francs
+64%
8
Effects of Exchange-Rate Changes
on Costs and Prices (5 of 10)
• Generalization
• As franc-denominated costs become larger
portion of Nucor’s total costs, dollar
appreciation (depreciation) leads to
• Smaller increase (decrease) in franc cost of Nucor
steel
• Larger decrease (increase) in dollar cost of Nucor
steel compared to cost changes that occur when
all input costs are dollar denominated
© 2019 Cengage. All rights reserved.
9
Effects of Exchange-Rate Changes
on Costs and Prices (6 of 10)
• Exchange-rate fluctuations cause changes in
relative costs
• Influencing relative prices and volume of goods
traded among nations
© 2019 Cengage. All rights reserved.
10
Effects of Exchange-Rate Changes
on Costs and Prices (7 of 10)
• Dollar depreciation lowers U.S. production costs
• Lowers export prices in foreign currency terms
• Induces increase in U.S. goods sold abroad
• Dollar depreciation leads to decrease in U.S. imports
© 2019 Cengage. All rights reserved.
11
Effects of Exchange-Rate Changes
on Costs and Prices (8 of 10)
• Dollar depreciation lowers U.S. production costs and
thus export prices in foreign currency terms
• Induces increase in U.S. goods sold abroad
• Dollar depreciation leads to decrease in U.S. imports
© 2019 Cengage. All rights reserved.
12
Effects of Exchange-Rate Changes
on Costs and Prices (9 of 10)
• Factors influencing extent to which exchangerate movements lead to relative price changes
• U.S. exporters can offset price-increasing effects of
appreciation by reducing profit margins
• Perceptions of long-term trends in exchange rates
may promote price rigidity if appreciation seen as
temporary
© 2019 Cengage. All rights reserved.
13
Effects of Exchange-Rate Changes
on Costs and Prices (10 of 10)
• Factors influencing extent to which exchangerate movements lead to relative price changes
(cont’d)
• If product not highly substitutable, producers can
exercise greater control over price
• Production can be moved offshore, to countries
whose currencies have depreciated against home
country currency
© 2019 Cengage. All rights reserved.
14
Cost-Cutting Strategies of Manufacturers in
Response to Currency Appreciation (1 of 6)
Appreciation of yen: Japanese
manufacturers
• 1990–1996, Japanese yen relative to U.S.
dollar increased by 40%
• Japanese firms
• Establish integrated manufacturing bases in the
U.S. and in dollar-linked Asia
• Use cheaper dollar-denominated parts and materials
• Purchase cheaper components from around the world
• Shifted production from commodity-type goods to
high-value products
© 2019 Cengage. All rights reserved.
15
Cost-Cutting Strategies of Manufacturers in
Response to Currency Appreciation (2 of 6)
• Appreciation of the yen: Japanese
manufacturers
• Hitachi TV Sets
•
•
•
•
Parts from SC and Malaysia
Japan supplied computer chips
Only 30% of supplies came from Japan
TV price stayed low despite rising yen
© 2019 Cengage. All rights reserved.
16
Cost-Cutting Strategies of Manufacturers in
Response to Currency Appreciation (3 of 6)
© 2019 Cengage. All rights reserved.
17
Cost-Cutting Strategies of Manufacturers in
Response to Currency Appreciation (4 of 6)
• Appreciation of yen: Japanese
manufacturers (cont.)
• Japanese auto industry
• Cut the yen prices of their autos
• Falling unit-profit margins
• Reduced manufacturing costs
• Increasing worker productivity
• Importing materials and parts
• Outsourcing larger amounts of a vehicle’s production to
transplant factories
© 2019 Cengage. All rights reserved.
18
Cost-Cutting Strategies of Manufacturers in
Response to Currency Appreciation (5 of 6)
• Appreciation of dollar: U.S. manufacturers
• 1996–2002, dollar appreciated by 22%
• American Feed Co.
• Napoleon, Ohio
• Made machinery used in auto plants
• when orders come in, two companies meet to
decide which plant should make which parts
• American Feed can share in the benefits of having
a European production base without having to take
on risks of building its own factory there
© 2019 Cengage. All rights reserved.
19
Cost-Cutting Strategies of Manufacturers in
Response to Currency Appreciation (6 of 6)
• Appreciation of dollar: U.S. manufacturers
• Sipco Molding Technologies
• Partnership with an Austrian company
• Austrian company designed and made the tools
• Sipco simply resold them
© 2019 Cengage. All rights reserved.
20
Will Currency Depreciation Reduce a Trade
Deficit? The Elasticity Approach (1 of 7)
Currency depreciation
• Improves nation’s competitiveness by
reducing its costs and prices
Elasticity approach
• Emphasizes relative price effects of
depreciation
• Depreciation works best when demand
elasticities are high
© 2019 Cengage. All rights reserved.
21
Will Currency Depreciation Reduce a Trade
Deficit? The Elasticity Approach (2 of 7)
• Absorption approach
• Focuses on income effects of depreciation
• Decrease in domestic expenditure relative to
income must occur for depreciation to
promote trade equilibrium
• Monetary approach
• Stresses effects of depreciation on purchasing
power of money and resulting impact on
domestic expenditure
© 2019 Cengage. All rights reserved.
22
Will Currency Depreciation Reduce a Trade
Deficit? The Elasticity Approach (3 of 7)
• Elasticity of demand
• Responsiveness of buyers to changes in price
• Percentage change in quantity demanded
stemming from 1% change in price
• >1, elastic demand
•
Purchase answer to see full
attachment

User generated content is uploaded by users for the purposes of learning and should be used following Studypool’s honor code & terms of service.