Based on the article, \"Strong Dollar Creates Winners and Losers.\" 1. According

Question

Based on the article, "Strong Dollar Creates Winners and Losers."

1. According to the article, the dollar has climbed against the Japanese yen and the German mark. Does that mean that the dollar appreciated or depreciated against these currencies?

2. Which U.S. firms are being hurt by the climb in the value of the dollar, exporters of US products or importers of German and Japanese products?

3. Suppose a product costs an American manufaturer $100 to make and ship to Japan, where the product can be sold for 11,000 yen. If the exchange rate is $1=100 yen, how much profit will the US firm make? If the dollar exchange rate changes so that $1=100 yen, what will happen to the US firms profits? WHy might the firm be reluctant to increase its price to offset this change?

4. Why is it that firms selling "indistinguishable" products are the first to feel the impact of exchange rate changes?

Explanation / Answer

Winners and Losers

The appreciating dollar has produced both winners and losers in the U.S. economy. A rising dollar means that U.S. buyers of foreign goods and services now see their dollars stretch further. U.S. producers using foreign parts, or reselling foreign merchandise, for example, benefit from lower dollar costs due to the rise in the dollar. According to The Wall Street Journal (February 6, 1997, p. A2), Insignia Systems, Inc., a Minnesota firm that imports and resells Japanese-made sign-printing machines, "expects to turn its first profit (in 1997) in several years, mainly because (of) the rising greenback." In addition, U.S. consumers should benefit from lower import prices if foreign producers pass along exchange rate gains to consumers rather than increasing profits. Japanese car makers Honda and Toyota both recorded record sales in January and U.S. car producers lost market share as U.S. consumers responded to changes in the relative prices of U.S. versus foreign-made automobiles.

While businesses and consumers that buy imported goods and services benefit from a higher dollar, U.S. producers of goods that compete in world markets are facing new challenges. Detroit (car maker) executives say "the weak yen now gives the Japanese $3,000 to $5,000 in pricing leeway per car that can be used to cut sticker price or boost marketing - or profits." ("Who's Afraid of the Dollar," Business Week, February 24, 1997) To compete, U.S. companies "face the choice of cutting export prices and accepting lower profits, or passing along the price increase and losing customers." (The Wall Street Journal, February 6, 1997) U.S. companies that produce goods and services with close international substitutes (such as producers of livestock feed and computer network systems) have been hit hardest by the recent dollar appreciation, along with the U.S. tourism industry. Tourism officials in Hawaii, for example, are expecting fewer Japanese visitors this year due to the dollar's rise and a slow Japanese economy.

Recently, the value of the U.S. dollar has risen from strength to strength against a basket of currencies, notably against the euro and the yen. In fact, the dollar has reveled in the longest streak of gains since 1971.

While the strong U.S. dollar is good news for American consumers who can get more bang for their bucks when buying some imported goods or traveling abroad to certain areas, like Europe or Japan, American multinational companies find themselves in a different boat, say experts from Wharton and elsewhere. For one thing, their overseas earnings are worth a lot less when they translate unhedged profits into U.S. dollars.

This can have a big impact on U.S. firms when, for example, nearly 40% of total sales of S&P companies come from abroad. In the long run, however, the higher dollar is a mixed bag of pros and cons for U.S. global companies.

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