We’ve been discussing a number of macroeconomics topics as of late, an academic area of study I’m finding most fascinating. Of singular focus has been foreign exchange rates and their effect on tourists, exporting firms, and investors, both foreign and domestic.
Today’s NY Times has an excellent article on the European stance toward the weakening dollar. It discusses what the European finance ministers and central bankers might do to mitigate the effects of the dollar’s decline. Airbus is used as an example, significant profit loss is realized every time the euro gains relative to the dollar.
The plane maker, which sells its airplanes in dollars but incurs about 50 percent of its costs in euros, loses 1 billion euros, or $1.48 billion, in profit every time the euro gains 10 cents against the dollar
LW (Lovely Wife) and I recently returned from Ireland and it was easier to pretend to bury the proverbial head in the sand and pretend the dollar was equal to the euro while we were there and had a wonderful time. We saved the shock and horror of fiscal reconciliation of bank statements and credit card receipts when we were safe and sound back home.
However, if I were an American manufacturing firm exporting goods overseas, I would most certainly benefit from the dollar’s decline, as my domestically manufactured goods for export would appear far more attractive to foreign consumers.
A brief discussion of the Law of One Price.
The law of one price states that an identical good should sell for the same price in different locations. However, the rapid decline of the dollar has led to some price equality, as evidenced by the crush of foreign tourists here in the US.
I was recently at the Army-Navy game in Baltimore this past Saturday, and ran into some British friends at one of the numerous tailgates. They were living quite high on the proverbial hog having completed their Christmas shopping in New York, and continued their drunken sailor’s binge through DC and Baltimore. While they certainly weren’t planning on reselling the goods purchased here back in the UK, so arbitrage wasn’t quite the proper definition, they definitely stocked up on iPods and the like for gifts back home in the UK.
Law of One Price, eh? How does that Law account for uneven distribution costs, component labor disparities, currency markets, etc.?
Someday I’ll see an economic model that’s actually predictive, instead of asserting a normative state never seen ‘in the wild.’
The Army-Navy game was indeed fun, particularly from my perch in Section 535, with reps from the USNA class of 2000 – perhaps you noticed their blimp in the Staples parking lot?
And yes, I also have run into Brits who said they will be shopping in NYC for the holiday – the travel costs have been absorbed by the weakness of the dollar. As you say, the tradeoff will be found in the improved export market. I suppose it’s our turn.
Comment by drfuzzy — December 5, 2007 @ 9:54 pm |
What’s your take on the world markets the last few days and the fed this morning?
Comment by sprout2008 — January 22, 2008 @ 9:45 pm |