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Foreign trade and foreign exchange

Your company has definitely become a global company in the past 5 years. 40% of your sales are now exported to other countries. You import 60% of the raw materials which go into the production of your product. And you have begun to outsource some of your labor intensive activities to other countries as well. The value of the U.S. dollar has been depreciating versus many of the currencies from countries in which you do business.

Do these macroeconomic factors affect any of your decisions regarding the price of your product or the quantity of the product you are choosing to produce? What other business decisions are impacted as well, and how? Explain.

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Do these macroeconomic factors affect any of your decisions regarding the price of your product or the quantity of the product you are choosing to produce? What other business decisions are impacted as well, and how? Explain.

Foreign trade and foreign exchange

When the value of the dollar falls or weakens in relation to another currency, prices of goods and services from that country rise for U.S. consumers. It takes more dollars to purchase the same amount of foreign currency to buy goods and services. That means U.S. consumers and U.S. companies that import products have reduced purchasing power.

At the same time, a weak dollar means prices for U.S. products fall in foreign markets, benefiting U.S. exporters and foreign consumers. With a weak dollar, it takes fewer units of foreign currency to buy the right amount of dollars to purchase U.S. goods. As a result, consumers in other countries can buy U.S. products with less money.

Advantages

* U.S. firms find it easier to sell goods in foreign markets.
* U.S. firms find less competitive pressure to keep prices low.
* More foreign tourists can afford to visit the U.S.
* U.S. capital markets become more attractive to foreign investors.

Disadvantages

* Consumers face higher prices on foreign products/services.
* Higher prices on foreign products contribute to higher cost-of-living.
* U.S. consumers find traveling abroad more costly.
* Harder for U.S. firms and investors to expand into foreign markets.

Thus the imports of raw material for the firm will become expensive as Dollar is depreciating.
Thus the Us firm has to increase the price of the product to absorb the costs. They have to source the raw material from alternate locations where it will find cheaper.

Other factors

Firms must constantly assess the business environments of the countries they are already operating in as well as the ones they are considering investing in.
It involves country risk analysis, the assessment of the potential risks and rewards associated with making investments and doing business in a country. This is the subject matter of political economy-the interaction of politics and economics. Such interactions occur on a continuous basis and affect not just monetary and fiscal (tax and spending) policies but also a host of other policies that affect the business environment, such as currency or trade controls, changes in labor laws, regulatory restrictions, and requirements for additional local production.
By extension, the international economic environment is heavily dependent on the policies that individual nations pursue. Given the close linkage between a country's economic policies and the degree of exchange ...

Solution Summary

Foreign trade and foreign exchange principles are summarized.

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