Business

Nominal and Real Exchange Rates for chile, 1979-1982 An 18% “corrective” devaluation was enacted in June 1982. Overall, the peso fell 90% over the next 12 months. However, the artificially high peso had already done its double damage to the Chilean economy: It made Chile’s manufactured products more expensive abroad, pricing many of them out […]

Application Chile Mismanages Its Exchange Rate Chile provides particularly dramatic illustration of the unfortunate effects of a fixed nominal exchange rate combined with high domestic inflation. As part of its plan to bring down the rate of Chilean inflation, the government fixed the exchange rate in the middle of 1979 at 39 pesos to the

The Effects of Real Exchange Rate Changes on the Brazilian Shoe Manufacturer In order to preserve its dollar profit margin (but not its inflation-adjusted real margin), the firm will have to raise its price to $14. (Why?1) But if it does that, it will be placed at a competitive disadvantage. By contrast, scenario 2 shows

Application Yen Appreciation Harms Japanese TV Producers For most of 1985, the yen traded at about ¥240 = $1. By 1995, the yen’s value had risen to about ¥90 = $1, without a commensurate increase in U.S. inflation. This rise had a highly negative impact on Japanese television manufacturers. If it cost, say, ¥100,000 to

Competitive Effects of Real Exchange Rate Changes In general, a decline in the real value of a nation’s currency makes its exports and import-competing goods more competitive. Conversely, an appreciating currency hurts the nation’s exporters and those producers competing with imports. When the real value of the dollar began rising against other currencies during the

The Effects of Nominal Exchange Rate Changes and Inflation on Apex Philippines *Peso prices and costs are assumed to increase at the 20% rate of Philippine inflation. Of course, the conclusion in the Apex Philippines application does not hold if the firm enters into contracts fixed in terms of the foreign currency. Examples of such

Inflation and Exchange Risk Let us begin by holding relative prices constant and looking only at the effects of general inflation. This condition means that if the inflation rate is, say, 10%, the price of every good in the economy rises by 10%. In addition, we will initially assume that all goods are traded in

Importance of the Real Exchange Rate The distinction between the nominal exchange rate and the real exchange rate is important because of their vastly different implications for exchange risk. A dramatic change in the nominal exchange rate accompanied by an equal change in the price level should have no effects on the relative competitive positions

Real Exchange Rate Changes and Exchange Risk The exchange rate changes that give rise to operating exposure are real exchange rate changes. As presented in Chapter 4, the real exchange rate is defined as the nominal exchange rate (e.g., the number of dollars per franc) adjusted for changes in the relative purchasing power of each

The Time Pattern of Economic Exposure Application American Filmmakers Suffer When the Euro Slumps According to a story in the Wall Street Journal (May 19, 2000, p. B1), “The euro’s plunge against the dollar is casting a pall over this year’s Cannes Film Festival, forcing European distributors to curtail their purchases of American films and