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profit improvement false prosperity

2. The sharp decline of the U.S. dollar between 1985 and 1995 significantly improved the profitability of U.S. firms both at home and abroad.

a. In what sense is this profit improvement false prosperity?

b. How would your incorporate the decline in the dollar in evaluating management performance? In making investment decisions?

c. Comment on the following statement: "The sharp appreciation of the U.S. dollar during the early 1980s might have been the best thing that ever happened to American industry."

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a. In what sense is this profit improvement false prosperity?

ANSWER. High profits are due to the state of the dollar, not to sustainable competitive advantage. A reversal of the dollar's fortunes (as has recently occurred) will cause these profits to disappear. In the meantime, management may mistakenly believe it has performed well; this could lower incentives for efficient production and critical innovation of sustainable competitive advantages.

b. How would your incorporate the decline in the dollar in evaluating management performance? In making investment ...

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