Monday, March 16, 2009
Chapter 5, 5.3
Exchange rates can affect a firm's global sales because a variance in exchange rate can affect the international viability of a nation's currency. When a currency is weak with regard to international standard or with regard to the currency of a competitive market, sales may be significantly affected. Both individual consumers and large wholesalers may be more or less likely to purchase based on the relative strength of their currency in the global market.
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The exchange rate is the price of one country’s currency in terms of another country’s currency. If a country’s currency appreciates, less of that country’s currency is needed to buy another country’s currency. If a country’s currency depreciates, more of that currency will be needed to buy another country’s currency.
ReplyDeleteIf, say, the U.S. dollar depreciates relative to the Japanese yen, U.S. residents have to pay more dollars to buy Japanese goods. As the dollar depreciates, the prices of Japanese goods rise for U.S. residents, so they buy fewer Japanese goods—thus, U.S. imports decline. Or seen in another way: sales of Japanese goods in the United States decline. At the same time, as the dollar depreciates relative to the yen, the yen appreciates relative to the dollar. This means prices of U.S. goods fall for the Japanese, so they buy more U.S. goods—and U.S. exports (i.e., sales in foreign markets) rise.