Quiz 6: Managing in the Global Economy
U.S dollar is said to be depreciated when its value decreases relative to other currencies in the world. Effect of dollar depreciation on exports As the U.S dollar depreciates, the domestic goods are relatively cheaper in the countries in which it exports. That is, U.S goods would become cheaper in the importing countries. As a consequence, demand for exports from U.S would increase leading to a positive effect on domestic business. Effect of dollar depreciation on domestic sales The depreciation of dollar makes imports relatively expensive for the domestic country. If the manufacturer requires inputs to be imported from other countries, depreciation of dollar would increase input costs. Increased input cost may induce the manufacturer to reduce the supply in domestic market resulting in increased prices for domestically produced goods.
U.S dollar is said to be appreciated when its value increases relative to other currencies in the world. The currency becomes stronger. With appreciation of dollar, the exports would become relatively expensive in foreign countries and thus, the demand for U.S produced goods will decline. To avoid the risk of expected exchange rate fluctuation, CE Co. can enter into an agreement to exchange dollars for foreign currency at current rate on a future date. In this way, the manufacturer can lock the export sale at the current exchange rate, guaranteeing transaction at the agreed upon price. Thus, if the U.S. dollar actually strengthens afterward, the manufacturer will profit from it. It will be able to maintain its competitiveness with the locked exchange rate.
As a result of unanticipated appreciation of dollar, the U.S exports would become relatively expensive, while imports become relatively cheaper. Since imports are cheap, it is recommended to out-sourcing inputs and other raw materials from other countries. They can also move their production units overseas. Manufacturers should cut export prices to remain competitive in the market. Further, manufacturers can plan investment in product lines the demand for which is more inelastic with respect to price and less sensitive to exchange rate fluctuations.