Suppose ABC Inc., a U.S. auto manufacturer, obtains some of its auto components in Mexico

Suppose ABC Inc., a U.S. auto manufacturer, obtains some of its auto components in Mexico

Category:
December 29, 2020
37 Views
0
0

Suppose ABC Inc., a U.S. auto manufacturer, obtains some of its auto components in Mexico and that the costs of these components are denominated in pesos; the costs of the remaining components are denominated in dollars. Assume that the dollar’s exchange value appreciates by 50 percent against the peso. Compared to your answer in study question 8, what impact will the dollar appreciation have on the firm’s international competitiveness? What about a dollar depreciation?

 

Answer and ExplanationSolution by a verified expert

Here is a tip:

Currency depreciation results in relative loss in value of domestic currency in terms of foreign currency.

Explanation

In the domestic market,dollar appreciation will result in constant cost in dollar terms. However, a firm's peso-denominated costs face a 50% increase making it relatively expensive.This will increase the cost of imports for Country M from Country U ,so country M will look for cheaper alternatives but given that some portion of input cost is peso denominated the relative rise in cost will be less as compared to entire dollar denominated input.. Hence loss of market share will happen to Country U but relatively less than previous part
 
For 50% appreciation, dollar's value with respect to peso will rise by 50%.Assuming initially one dollar equals one peso.50% appreciation will result in one dollar equal to more than 1 peso, however some portion of the cost will be offset by peso denominated input.
 
In the domestic market,dollar depreciation will result in constant cost in dollar terms. However, a firm's peso-denominated costs face a 50% decrease making it relatively expensive.This will decrease the cost of imports for Country M from Country U ,so country M will increase imports but given that some portion of input cost is peso denominated the relative fall in cost will be less as compared to entire dollar denominated input.. Hence gain of market share will happen to Country U but relatively less than previous part
 
For 50% depreciation, dollar's value with respect to peso will fall by 50%.Assuming initially one dollar equals one peso.50% depreciation will result in one dollar equal to less than 1 peso, however some portion of the cost will be offset by peso denominated input.

Verified Answer

When the dollar appreciates against the peso, the cost of goods imported by Country M from Country U will increase. As a result of which, Country M shall switch to other countries to look for cheaper alternatives.However given that a portion of the cost of Country 's product is denoted in peso,the rise in cost of Country U's product will be relatively less than all domestic based input . This will decrease the international competitiveness of the firm operating in Country U. However the decrease will be relatively less than the previous case.
 
When the dollar depreciates against peso, the reverse happens. Country M has acquired more buying power and therefore shall depend on Country U for most of its imports.However the increase in purchasing power will be relatively less than the case when all inputs are based in dollars.This increases the international competitiveness of the firm operating in Country U but less than the previous case.

Purchase this answer to view it.
Click the button to login/signup and buy full solution at 2 USD only.

The Best Research Paper Writing Service

Would you want to pay someone to write your paper professionally from scratch? 100% Original and 0% AI Content!.

🎓 Write my Essay
📚 Write my Persuasive Essay
📋 Humanize AI Content for Turnitin
💻 Write my Reflective Essay
📑 Write my Research Paper
📜 Write my Thesis Paper
📘 Write my Dissertation
📋 Write my Case Study
📝 Write my Online Exam
✒️ Write my Term Paper
Write my Paper