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Disequilibrium Due to Government Regulation Supply P Q P Q Demand P Q P Q (A) (B) (C) (D) Demand Supply Current Price Current Price Supply Limit

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Text of Disequilibrium Due to Government Regulation Supply P Q P Q Demand P Q P Q (A) (B) (C) (D) Demand...

  • Disequilibrium Due to Government Regulation SupplyPQ SupplyPQPQDemand PQ (A) (B) (C) (D)

    Supply SupplyCurrent Price Current Price Current Price Current PriceSupply Limit

  • Home AbroadCurrrent account = trade balance= net exportsMoneyReal goods and services - importsReal goods and services - exportsCAPITAL ACCOUNTTitles to American wealth sold to foreignersUnilateral transfersMoneyMoneyTitles to foreign wealth sold to AmericansBALANCE

    OF

    PAYMENTS

  • $ in Foreign Exchange Mkt in Foreign Exchange MktPrice of a Dollar Price of Yen/$ $/

  • Value of the Mexican Peso in $

  • COUNTRY GDP per Person (1993)U.S.$24,580Canada$18,940Mexico $3,679

    Argentina $7,505Brazil $3,528Chile $3,067Cuba $1,959Colombia $1,339

    Japan$34,160South Korea $7,368China $1,738Phillipines $791

  • Unit Labor Costs in Mexico (AER,May 1996

  • Percentage Change in Value of the Mexican Peso (per $)

  • U.S. MerchandiseTrade Balance w/ Mexico

  • U.S. MerchandiseTrade Balance w/ MexicoPercentage Change in Value of the Mexican Peso (per $)

  • U.S. MerchandiseTrade Balance w/ MexicoCheaper peso means* more imports from Mexico* fewer exports to Mexico==> larger U.S. Trade deficit

  • U.S. MerchandiseTrade Balance w/ MexicoPercentage Change in Value of the Mexican Peso (per $)U.S. Surplusesmean Mexicandeficits

  • Mexican Trade Deficits MUST BE FINANCED with hard currency (U.S. $)

    BUT, Greater Demand for U.S. Dollars ($)

    MEANS A Higher Value for the U.S. Dollar ($) MEANS

    A LOWER VALUE FOR THE PESO

  • In 1994 the economy is perfectly set up for another devaluationof the Peso

  • Add the additional fuel of:- An armed insurrection combined with terrorism.- The assasination of the leading presidential candidate.- Political scandals- Kidnappings of prominent businessmen - A fixed nominal exchange rate.- More financial transactions.

  • Mexico attempted a devaluation of 15% on December 20, 1994

    Speculative interests unloading the peso in New York accelerated the decline

  • THE VALUE OF THE YEN ($/yen)Year

  • THE VALUE OF THE DOLLAR (yen/$)Year

  • U.S. INFLATION (CPI) & U.S. INTEREST RATES (PRIME RATE)(% annual change)Year

  • INTEREST RATES (PRIME RATE): U.S. and Japan(% annual change)Year

  • INFLATION (CPI): U.S. and Japan(% annual change)Year

  • JAPANESE INFLATION (CPI) & INTEREST RATES (PRIME RATE)(% annual change)Year

  • REAL INTEREST RATE: U.S. and Japan(% annual change)Year

  • Difference in U.S. and Japanese Rates (% annual change)Year

  • Foreign Price / value of the dollar = U.S. price

    1872.55 yen / 220.30 yen = $8.50 1.0 $U.S. Price * value of the dollar = Foreign price

    $8.50 * 400 yen = 3400 yen 1.0 $

  • Average Profit = Price - Unit cost Price in US $- (Unit cost in Yen/ value of yen)

    At 400 yen per dollar$4.50 = $12.00 - (3000 yen / 400 yen per dollar)

    At 400 yen per dollar$2.00 = $12.00 - (3000 yen / 300 yen per dollar)

    At 400 yen per dollar-$3.00 = $12.00 - (3000 yen / 200 yen per dollar)

  • Alternative Sources of Telephones: 1981

  • SOURCING COSTS REFLECTING CHANGES IN EXCHANGE RATES (per phone)

  • Savings From Three Types of Flexibility:I. Opportunity saving buying from Canada instead of the U.S.= 300,000 phones * ($8.50-$8.00 per phone)=$150,000

    II. Opportunity saving from one year rather than three year contracts(which allows swithcing to lowest cost producere each year)= 100,000 phones in 1982 * ($8.00-$7.28) + 100,000 phones in 1983 * ($8.00-$7.40) =$132,000

    III. Opportunity saving from storing (buying from Japan in 1982 to meet 1983 needs, even after $.07 costs of inventories)=100,000 phones in 1982 * ($7.40-$7.28+.07)=$5,000

    TOTAL OPPORTUNITY SAVING = $287,000

  • INTEREST AND EXCHANGE RATE CHANGESStart: Japanese invest 1000 yen in 1985 at 215.9 yen per dollar with a gauranteed interest rate of 7.97%.

    End: Japanese liquidate their investment at 178.55 yen in 1986

    Calculation of gain:

    1000 yen * 1 *1.0797 * 178.55 = 892.92 yen 215.9

    Opportunity loss: Could have earned 1064.7 yen by investing at home.

  • SAVINGS THROUGH DIVERSIFICATION

  • SPOT AND FUTURES MARKET PRICES FOR OIL: 1975-7619761975