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Rotman > Economic Environment of International Business > Flashcards

Economic Environment of International Business Flashcards

1
Q

(1) Two-Speed Recovery in Europe

A
  • Europe has an economy that is characterized by a central core of countries (strong Germany)
  • There are nations on the periphery of europe (greece, italy, spain, portugal, ireland), these nations have been suffering low growth and the prospects for enhanced growth are severely limited/constrained.
  • Germany has the clout to change the economic and financial environment in europe
  • Shows how different countries in the same area can operate at different economic levels
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2
Q

(1) Global two-speed recovery

A
  • The economic growth in the world is emanating not from the old line players (western europe, north america, japan), but it is emanating from emerging nations such as brazil, china and mexico
  • The emerging nations are leading the growth, the industrial nations can’t find a way to bring on this growth
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3
Q

(1) Balance of Payments Accounts (3)

A
  1. The Current Account
  2. The Capital and Financial Accounts
  3. The Reserve Account
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4
Q

(1) Current Account

A
  • records (on a quarterly or annual basis) flows of exports, imports, investment income and international financial transfers
  • “Credits” money that flows into Canada (ex to buy Canadian goods/services or to travel in Canada)
  • “Debits” money that flows out of Canada (ex when Canadians import goods/services, when Canadinas travel abroad, when Canada pays interest or dividends to foreigners)
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5
Q

(1) Capital and Financial Accounts

A
  • record (on a quarterly or annual basis) the flows of capital that move into or out of Canada within the period
  • the difference between the value of foreign purchases of Canadian assets and Canadian purchases of foreign assets
  • “Credits” when there is an inflow of capital to Canada (ex. an American buys a bond issues by a Canadian government)
  • “Debits” when there is an outflow of Canadian capital (ex a Canadian buys a bond issued by a foreign government)
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6
Q

(1) Reserve Account

A
  • Records changes in the amount of “official” foreign exchange reserves held by the Bank of Canada
  • these changes tend to be very small relative to the total foreign exchange for commercial and international investment purposes
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7
Q

(1) Balance of Payments Identity

A

Balance of Payments MUST balance!
BCA + BKC + BRA = 0
BCA = Balance on Current Account
BKC = Balance on Capital and Financial Account
BRA = Balance on Reserves Account
Since BRA is so small, we must make sure that BCA = BKA

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8
Q

(1) Current Account in Canada

A
  • In General: The value of our exports exceeds the value of our imports
  • Total value of our merchandise trade exports (forest products, minerals, energy, etc) exceeds the value of our imported merchandise (electronics, clothing, foodstuff)
  • Canadian Outflows of Investment Income Receipts and Investment Income Payments far exceeds the inflow of receipts from abroad –> Canadian industry is very capital intensive, and so we import capital to use.
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9
Q

(1) Exchange rate’s impact on the trade balance

A
  • When the Can $ appreciates then Canadian-produced goods become more expensive in the export market –> so exports decrease
  • When the Can $ appreciates, the stronger Canadian dollar makes imports cheaper
  • As exports fall and imports rise the trade balance deteriorates
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10
Q

(1) Trade Balance

A

Exports minus Imports

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11
Q

(1) J-Curve effct

A
  • J-Curve is a reaction pattern of the trade balance to currency depreciation.
  • it depicts an initial deterioration and eventual improvement of the trade balance following currency depreciation
  • since it takes time for the trade balance to adjust to a depreciation in currency, curve is observed
  • after depreciation: some importers continue to import at high prices before finding alternative domestic sources, and exporters require time before they start exploiting the new opportunities in markets abroad
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12
Q

(1) Capital Account vs Financial Account

A

Capital Account - records a nation’s capital transfers and transactions in non-produced, non-financial assets (such as patents and copyrights)

  • Financial Account records a nation’s international transactions in financial assets (such as bonds, loans or equities)
  • There is generally much more activity in the Financial Account as opposed to the Capital Account and it is the more important of the two accounts
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13
Q

(1) Two Categories of Financial Assets recorded in the Capital & Financial Account

A
  1. Direct Investment- foreign direct investment is what multinational enterprises do - for example McCain setting up food processing plant in France with equity injections of $10 mil - the $10 mil is a debit in the Capital Account (BUT flow of earnings from that capital is recorded as investment income in Current Account)
  2. Portfolio Investment - Canadian purchases of shares of foreign companies, foreign purchases of shares in Canadian companies, Canadian purchases of foreign bonds and foreign purchases of Canadian bonds
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14
Q

(1) Dutch Disease

A

The relationship between the increase in exploitation of a natural resource and the decline in the manufacturing sector. As a country’s revenues increase from natural resources, their currency will become stronger, resulting in their exports becoming more expensive for other nations, thus making the manufacturing sector less competitive.

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15
Q

(2) Factor Price Ratio

A

Factor Price Ratio = Cost of 1 unit Labour / cost of 1 unit Capital = w/r

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16
Q

(2) with 1 country, 2 industries, what happens when the factor price ratio changes?

A

both industries will adjust to the new factor prices by employing more of the factor that has become relatively cheaper and less of the factor that has become relatively more expensive

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17
Q

(2) Production Possibilities Frontier

A

shows how much cloth and wheat (or two other products) can be produced simultaneously (given the country’s resources and technology) and how much cloth and how much wheat is produced given the country’s preferences for cloth and wheat in light of all production possibilities

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18
Q

(2) General equilibrium in the economy (1 country, 2 factors)

A

summarized at the point of tangency of the relative product price line (Pw/Pc) and the Production Possibilities Frontier

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19
Q

(2) Commodity Price Convergence

A

when you open up to trade with the world, the system moves to world prices. The good which is relatively more expensive will fall and the good which is relatively cheap will rise

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20
Q

(2) What happens when you open trade up internationally?

A
  • The country with a comparative advantage in a product will increase production of that product and decrease production of their other product.
  • They will export their comparative advantage product and import the other product
  • The previously different (country-specific) commodity price ratios (Pw/Pc) will converge to a common Pw/Pc for world prices
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21
Q

(2) Trade Triangle

A

a diagrammatic construction to compare the production (and thus the factor usage) in one country before trade and after trade

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22
Q

(2) Driving forces of trade

A

to produce goods (and services) in the places where they can be produced most efficiently, and to sell (or direct) those goods to the places where they are valued most highly

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23
Q

(2) With Trade Liberalization there are…(3)

A
  1. Product prices converge to world prices
  2. Countries move towards industrial specialization, but not to full specialization
  3. Factor prices converge to the world factor price ratio
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24
Q

(2) What happens with trade liberalization and it’s effects on the factor price ratio?

A
  • Production in one country shifts toward more labour-intensive production and less capital-intensive production
  • Production in the other country shifts to less labour-intensive production and more capital-intensive production
  • The country that shifts toward more labour-intensive production experiences an excess demand for labour and a rise in w/r (factor price ratio)
  • The country that shifts toward more capital-intensive production experiences an excess supply of labour and a fall in w/r
  • eventually a new world factor price ratio (w/r) comes to lie between the pre-liberalization w/r of the two individual countries
  • this is factor price convergence
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25
Q

(2) Efficiency gains

A

when two countries open up to trade and each country does their specialization, then the world production of both goods expand and the world enjoys “efficiency gains”

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26
Q

(2) What happens when you increase supply of a factor? (ex technology improvement)

A
  • The increased supply of a factor lowers the cost of that factor relative to the other factor
  • in the country that experiences the increased supply: the industry that uses the increased factor intensively gains a relative cost advantage and it’s production increases. the industry that does not use the increased factor intensively suffers a relative cost disadvantage and it’s production decreases.
  • The world price of the increased factor falls
  • the world price of the product that uses the increased factor intensively falls
  • trade increases
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27
Q

(2) Exports in Japan

A
  • in Japan exports are a small percentage of GDP (13%)
  • japan has been expanding its exports, but it’s reluctant to open its doors to imports
  • Japan has been in a dark period since they are not open to immigration
  • they have an aging economy that is causing it to have it’s own labour force shrink and it hasn’t found a way to collectively decide on how it’s going to open its doors to other sources of labour
  • this is one of the reasons exports are so low in japan
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28
Q

(2) Importance of trade - big vs little countries

A
  • in the US trade is a smaller percentage of GDP (11%) because the US is so large
  • smaller countries rely on trade more and they are the most vulnerable
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29
Q

(2) Canada’s Trade with the US

A
  • Canada is disproportionately engaged in trade with the US (72% of exports to US, and 62% of imports from US)
  • this is down from what it used to be, because of the rise of asian economies
  • these figures have shaped canada’s concern about international trade
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30
Q

(2) Why does Canada import energy?

A

we make tons of energy, but our energy does not go much further than Toronto, so the areas east of toronto (ie. Atlantic Canada) has to import oil

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31
Q

(2) Revealed Comparative Advantage

A
  • We want to look at what sectors are growing (for exports) and how big a part they play in the total share in Canada
    ex. Exports of crude petrolium is growing at 13% and the share in canada is 15%, so we have a comparatie advantage in it
  • we can see from the numbers what Canada is good at and what Canada is not so good at
  • where we do not have a revealed comparative advantage we import
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32
Q

(2) World price

A

the price which a traded goods trade, net of any tariffs

-These are the proper prices to evaluate in the world of traded goods

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33
Q

(2) Production Possibilities Curve

A
  • shows how a nation’s industry can shift from one production activity to another
  • a nation can substitute a unit of wheat production for units of cloth production and vice versa
  • the slope of the PPC is the marginal rate of technical substitution of wheat for cloth
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34
Q

(2) Comparative Advantage

A
  • what a country is relatively more efficient at producing
  • if each nation were to specialize in its comparative advantage and trade freely with others, then the world would get the most output from its limited resources
  • market economies and free trade would naturally exploit comparative advantage
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35
Q

(2) Tariff

A
  • a tax on an imported good
  • the tariff-inclusive price of an imported good in the importing country is higher than the world price
  • the domestic price of a good subject to a tariff increases to the “world price + tariff”
  • domestic demand for a good subject to a tariff is less than it would otherwise be (because it’s more expensive now)
  • domestic production of the good increases, but is less efficient than if the good was imported
  • there is also loss of consumer surplus
  • damage is also done on exporting countries of this good who now lose exports, jobs and profits
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36
Q

(2) The effects of a tariff depend on…

A
  • elasticity of domestic supply
  • depending on the slope of the supply curve, the impact of the tariff will be more or less
  • the greater the elasticity of supply, the lower is the tariff required to achieve a given degree of protection to domestic production
37
Q

(2) Effect of removing a tariff

A
  • reverses the losses
  • production becomes reallocated to where it is done most efficiently
  • however the distribution of the gains and losses (both across countries and within countries) is unlikely to be even
  • tariff policy (and the removal of tariffs) is a political process
38
Q

(2) Effect of removing ALL tariffs

A
  1. trade expands
  2. nations reallocate production inline with comparative advantage
  3. commodity price ratios converge to a “world commodity price” ratio
  4. factor price ratios converge to a “world factor price” ratio
39
Q

(2) what is the difference between a tariff and any other trade-inhibiting imposition?

A

Not much

  • other trade-inhibiting impositions include quotas, differential standards or differential taxes (for example on transportation)
  • virtually no difference in terms of the allocative effects (production and consumption) but differences in government revenue
40
Q

(2) tariff effect on large vs small countries

A

country size makes an important difference in the distribution of effects of trade restrictions

  • small countries unambiguously suffer
  • small refers to whether a country is large enough to affect the world price of a particular good
  • small countries almost always hurt themselves with import tariffs
  • a large country can potentially improve its terms of trade with an import tariff - the improvement can be sufficiently large to offset the negative effects of production inefficiencies its tariff induces (optimum tariff)
41
Q

(2) Optimum tariff

A

The optimum tariff is one which maximises imposing country’s gain or welfare from trade.
-a large country’s demand may be sufficiently large than it can “force” exporting nations to reduce their selling price of exports

42
Q

(2) Effective Protection

A

a nation will import a raw material duty-free but will impose a tariff on final products produced with the imported input
ex. countries that have no tariff on coffee beans but high tariffs on roasted coffee. they are protecting their industries scope to add value

43
Q

(2) Nominal vs Effective tariff

A
  • nominal tariff is the tariff imposed on an imported final good
  • effective tariff is the amount of tariff in relation to the value added of a good. for example if value added of a suit is $20, and the tariff to import is $10, then the effective tariff is 50%
  • if you can import the raw materials of the good without tariff and but final product has tariff then effective tariff is different than nominal tariff
  • if raw material tariff is same as final product tariff then effective tariff = nominal tariff
44
Q

(2) Technical progress means…

A
  • you can get more outputs for the same inputs

- the marginal product of that input has risen

45
Q

(2) Rybczynski Theorem

A
  • at constant commodity prices an increase in the endowment of one factor will increase by a greater proportion the output of the commodity that is intensive in that factor
  • if a nation acquires more of one factor of production, that factor becomes “locally inexpensive” and industries will shift production in favour of that factor. industries that use that factor intensively will be favoured and their output will increase
46
Q

(2) Stolpher-Samuelson Theorem

A

an increase in the relative price of a commodity (ex. as a result of a tariff) raises the return or earnings of the factor used intensively in the production of that commodity.

47
Q

(2) Dumping

A

“dumping” is a kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market competition.

48
Q

(3) Three factors affecting innovation outcomes of Canadian Manufacturing Firms

A
  1. Research and Development investment
  2. Technology Competencies of firms (firms that place more emphasis on technology strategies are more innovative)
  3. Past innovation activities (the use of patents and trade secrets is a strong predictor of being an innovator)
49
Q

(3) What is the main determinant of the prosperity and standards of living in the long run?

A 
productivity growth. 
Higher productivity (measured by production per hour worked) occurs when output increases faster than hours worked
50
Q

(3) Process vs product innovation for labour productivity growth

A
  • process innovation is more important than product innovation for labour productivity growth
  • process innovators had an annual labour productivity growth 3.6% higher than non-process innovators
  • process innovation is associated with higher plant survival rates while product innovation is related to lower survival rates
  • product innovation dominates the early stages of the life cycle, while process innovation occurs later when market shake outs have already occured
51
Q

(3) firm size and relation to innovation

A
  • firm size is more closely related to process innovation than product innovation
  • large firms have higher process innovation than small firms, but there is no difference in product innovation rates
  • failing to innovate will lead to the closure of even large plants
52
Q

(3) what happens in industries that have substantial economies of scale and trade barriers are torn down?

A

-they will actively foster those economies and the technological enhancements that drive them by concentrating production, research and corporate strategy in one location while serving foreign markets via exports

53
Q

(3) New evidence for scale economies

A
  • it was previously thought that there are usually constant returns to scale
  • new study says that 2/3 of manufacturing industries exhibit increasing returns to scale
  • another 1/3 of manufacturing industries exhibit constant returns to scale. In this case they are more likely to emphasize proximity to market in order to economize on transportation costs and to establish a local presence
  • thus a substantial share of world trade emanates form industries that enjoy economies of scale
  • high end manufacturing usually has increasing returns to scale
  • low end manufacturing usually has constant returns to scale
  • natural resources have returns below those for high-end manufacturing
54
Q

(3) Industrial productivity and commodities

A
  • productivity is enhanced by creating products and services that consumers find valuable and for which they pay a premium
  • commodities and undifferentiated products tend to be relatively unexciting in productivity terms, and productivity growth tends to come from cost cutting and ever-leaner production
  • small firms tend to be less productive on average than larger firms
55
Q

(3) “Trading Up” Key points

A
  • FTA led to sharp increase in trade b/w Can and US
  • Can and US experienced exceptional growth in trade in sectors liberalized by the FTA
  • A number of industries experienced fast 2-way trade growth, suggesting an increased degree of intra-industry specialization
  • NAFTA allowed Can to sustain exports to Mexico, despite Mexico’s economic crisis, and Can and US were protected by the impact of Mex’s crisis
  • Can’s investment performance has been solid under the FTA. Can continued to attract a share of total NA business capital expenditures that is equal to or better than historical
  • Can and US have been less important destinations for foreign direct investment for each other, and a greater focus on FDI with other countries
  • Can’s inadequate job creation performance cannot be blamed on free trade
  • Can still has problem with overall productivity and earnings performance
56
Q

(4) Effect of a tarrif

A
  • Tariff leads to reduced amounts of imports
  • Increased domestic supply into inefficient zones of production
  • reduction in domestic demand (because new price is higher than world price)
  • economic cost is the lost of consumer surplus
  • another loss is the reallocation of resources into the inefficient production of good
57
Q

(4) Effect of a Quota

A
  • instead of issuing a tariff, issue a quota (a maximum amount of imports)
  • It puts you essentially the same place as a tariff
58
Q

(4) Effect of a subsidy

A
  • If receiving an export subsidy, a firm can remain competitive abroad by exporting up to the foreign price (because the subsidy will cover some of the difference) yet receive the higher price domestically.
  • The effects of a subsidy are the opposite of those of a tariff.
  • subsidies can promote exporting (by giving local producers an advantage to product them, they can export them at a cheaper price)
59
Q

(4) Tariffication

A

Tariffication is an effort to convert all existing agricultural Non-tariff barriers to trade (NTBs) into bound tariffs and to reduce these tariffs over time
-Finding the tariff-equivalent of a non-tariff trade distorting (import-reducing) intervention

60
Q

(5) Import protection vs exporting promoting

A
  • tariffs and non-tariff barriers are import protection
  • production subsidies and dumping are export promoting
  • They are both violations on free trade
61
Q

(5) Production subsidy

A
  • must come from an official agency (government)

- if other nations are injured then they will challenge the government

62
Q

(5) Dumping

A

-is export promoting
-where a company will sell its product at a price in the destination market that is below production costs in the country of origin (exporting nation)
-strategic action taken by companies to do strategic pricing in global markets to capture market share in a foreign market
-a form of predatory pricing
-

63
Q

(5) WTO

A

World Trade Organization

  • based in Geneva
  • 168 member nations… it’s a “club”
  • oriented towards rules
  • WTO has NO direct enforcement power
  • maintains a dispute settlement mechanism
  • to be a member of the club you need to abide by the rules, but if you are a member then you can also help develop the rules
64
Q

(5) Action in trade disputes

A
  • Action must be initiated by an injured party in the importing nation - it must be a company (or it can be an industry)
  • the private sector injured party will file a complaint to the official agency of their own government (in Canada it’s a division within foreign affairs)
  • from then on it’s a government-to-WTO affair, the companies themselves are not engaged in the dispute after it’s been initiated
65
Q

(5) What is injury?

A

-Reduced prices
-lost sales
-lost market share
-decreased profits
Any erosion of the profitability in a company where it can be attributed to something going on in another country. Generally happens as a result of export promotion or dumping

66
Q

(5) Action in dumping cases

A

Countervailing duties are imposed at:

  • specific rates
  • against specific producers
  • from specific exporters
67
Q

(5) Allowed vs not allowed subsidies

A

Allowed: any subsidies that do not violate WTO policy, one that enhances the quality of workers. Anything related to training, education or similar stuff is allowed, also support of research and development that is before the commercial stage is allowed

No allowed: any substantial support of an industry involved in a traded product that comes directly from a government body and enters into the cost structure of that product

68
Q

(5) Canada/Brazil trade dispute summary

A
  • Canada requests a WTO panel to rule on the ligality of Brazil’s ProEx export finance program
  • ProEx is an interest rate equalization programme that equalizes the cost of financing on exports of covered Brazilian products to international levels. It provides foreign purchases of Embraer aircraft with interest rate subsidies, which make them more advantageous to purchasers than if they bought from other countries
  • WTO originally gave Brazil 90 days to withdraw the prohibited export subsidies, and Brazil failed to do so (they said the rules don’t apply because they are a developing nation)
  • WTO ruled that ProEx was in line with international guidelines but it was only to be used to that Brazilian firms can finance deals at international market rates, not undercut them.
  • Both Canada and Brazil claim victory (Brazil because they were ruled not illegal and Canada because Brazil can not undercut international market rates)
  • Shortly after, Brazil claimed that Canada had illegal trade subsidies in the sale of Bombardier jets
69
Q

(5) Export Credit Arrangement

A
  • defines and sets limits on the most generous export credit terms and conditions that may be supported by its participants
  • seeks to encourage competition among exporters based on quality and price of goods and services rather than on the most favourable officially supported terms (ie. subsidies)
  • strives to make trade finance more transparent and governed by rules
70
Q

(5) OECD

A

-Organization for Economic Co-Operation and Development
-sometimes referred to as the “Rick Nations Club”
-founded to foster market-based policy development within and among member nations
Develops and endorses policies that encourage:
-highest sustainable economic growth and employment
-rising standard of living in member countries while maintaining financial stability (thus contributing to development of world economy)
-sound economic expansion in all countries
-expansion of world trade on multilateral, non-discriminatory basis

71
Q

(5) OECD Member nations (9)

A
  • Australia
  • Canada
  • European Community
  • Japan
  • South Korea
  • Norway
  • New Zealand
  • Switzerland
  • US
72
Q

(5) Export Credits

A

an insurance, guarantee or financing arrangement that allows a foreign buyer of exported gods and/or services to defer payment over a period of time

73
Q

(5) Official Support can take the form of:

A
  1. Official Financing Support: direct credits/financing, refinancing and interest rate support
  2. Aid financing (credits and grants)
  3. “Pure Cover”: export credit insurance and guarantees with no financing support
74
Q

(5) Limitations on terms of conditions that OECD arrangement places:

A
  1. minimum premium benchmarks
  2. minimum cash payments
  3. maximum repayment terms
  4. minimum interest rates
  5. restrictions on the provision of tied aid
75
Q

(5) Export Credits - CIRRs

A

Commercial Interest Reference Rate

  • should approximate final commercial lending interest rates in the domestic market of the currency concerned
  • should closely correspond to the rate for first class domestic and foreign borrowers
  • should be based on the local fixed interest-rate financing in the local market of no less than 5 years
  • should not distort domestic competitive conditions
  • they are set at a fixed margin of 100 basis points above their respective base rates unless otherwise agreed upon
76
Q

(5) Effects of raising or lowering CIRRs

A
  • Higher CIRRs improve the competitive position of companies who rely on private financing with official support by way of pure cover
  • Lower CIRRs enhance the competitive position of government export financing agencies vis-a-vis private sector financing companies
77
Q

(5) Tied aid

A
  • includes loans, grants or associated financing packages with a “concessionality” level greater than zero percent
  • tied to the procurement of goods and/or services from the donor country of selected other countries
  • should provide needed external resources to countries, sectors or projects with little or no market access to market financing
  • tied aid shall not be given to any countries whose GNP per capital is sufficient enough to quality for 17 year loans from the World Bank
78
Q

(5) Results of the OECD Arrangement

A
  • use of CIRRs coupled with a 6-month limit on finance offers has eliminated interest rate subsidies
  • reduced trade distortion with rules and procedures for tied aid
  • established a system of risk charges that act to reduce risk subsidies
  • changed role of Export Credit Agencies (increased transparency and instilled discipline)
  • Provide balance while avoiding a destructive and expensive export-credit race
79
Q

(6) Nominal exchange rate AND Direct vs Indirect quote

A

The number of units of domestic currency required to purchase one unit of a foreign currency.
Direct quote = CAN $1.25 is required to buy 1 Euro
Indirect quote 0.8 Euros required to buy CAN $1 (to use a foreign currency to explain the price of your own currency)

80
Q

(6) Support factors that drive innovation

A 
Domestic factors: 
-Government funding for R&D
-University education of Masters and PhD students
-Skilled investors
-capable mangers 
Trade factors:
-larger markets
-better supply chains
81
Q

(6) Pressure factors that drive innovation

A 
Domestic factors: 
-sophisticated consumers
-aggressive competitors
-investor demand for profitable growth
Trade factors: 
-challenging consumers
-more intense competition
82
Q

(6) trends in manufacturing in Canada

A
  • in general manufacturing has shrunk in canada
  • it grew in the 1990 a little bit – this is because we entered into a free trade agreement with the US, and that led to efficiencies in manufacturing that were pursued. So some manufacturing thrived and those that could not thrive died
83
Q

(6) relationship between manufacturing jobs and exchange rate

A
  • as exchange rate got weaker our manufacturing employment peaked
  • as Canadian exchange rate appreciated we see a decline in manufacturing
  • as exchange rate appreciates, we can buy substitute products abroad for cheaper, so we lose unsophisticated jobs (motor vehicle, sawmills, clothing, etc)
  • as our exchange rate appreciates, it favours the import substitutes and it is harder to export (it’s too expensive for other countries)
  • we kept our strong industries (architectural, pharmaceuticals, petroleum and coal, etc) and our weaker industries faded
  • jobs we didn’t lose: more added value and creativity-oriented jobs
84
Q

(6) If Canadian dollar appreciates, why do department store profits rise?

A

-because if it’s cheaper for department stores to import goods from other countries, and they keep the domestic price in their stores the same then they will make a profit

85
Q

(6) How do firms adjust to currency appreciation? (7)

A
  1. Raise prices
  2. reduce labour costs
  3. move inputs or processing abroad
  4. reduce capital spending
  5. increase hedging
  6. re-orient sales strategies
  7. do nothing
86
Q

(6) Pass through effect

A

A pass through of a change in your currency to keep your margins the same in a domestic currency
-if you are selling to a destination market and your currency appreciated, you raise the price in the destination market (the price passes through)

87
Q

(6) Main effects of Canadian dollar appreciation reported by adversely affected firms (4)

A
  1. lower margins to foreign sales (this happens to exporters, and they get lower margins on their export markets)
  2. lower export volume
  3. lower margins on domestic sales
  4. lower domestic volume
88
Q

(6) Real Exchange Rate

A

“real exchange rate” (RER) is the purchasing power of a currency relative to another.
The changes of the RER are instead informative on the evolution over time of the relative price of a unit of GDP in the foreign country in terms of GDP units of the domestic country.

Rotman (10 decks)

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