Disequilibrium Due to Government Regulation
(A)
(B)
Current Price
P
(C)
Current Price
Supply
Demand
P
Demand
(D)
Current Price
Supply
P
Current Price
P
Demand
Supply
Demand
Supply
Supply Limit
Q
Q
Q
Q
B
A
L
A
N
C
E
O
F
P
A
Y
M
E
N
T
S
Currrent account = trade balance= net exports
Real goods and services - imports
Money
Home
Abroad
Real goods and services - exports
CAPITAL ACCOUNT
Titles to foreign wealth sold to Americans
Money
Home
Abroad
Titles to American wealth sold to foreigners
Unilateral transfers
Home
Money
Abroad
Price of a Dollar
¥/$
$ in Foreign Exchange Mkt
Price of Yen
$/¥
¥ in Foreign Exchange Mkt
1000
Value of the
Mexican Peso in $
100
10
1
70
72
74
76
78
80
82
84
86
88
90
92
94
96
COUNTRY
U.S.
Canada
Mexico
Argentina
Brazil
Chile
Cuba
Colombia
Japan
South Korea
China
Phillipines
GDP per Person (1993)
$24,580
$18,940
$3,679
$7,505
$3,528
$3,067
$1,959
$1,339
$34,160
$7,368
$1,738
$791
180
160
140
120
100
80
60
Unit Labor Costs
in Mexico (AER,
May 1996
40
20
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
0
70
72
74
76
78
80
-10
-20
-30
-40
-50
-60
-70
Percentage
Change in Value
of the Mexican
Peso (per $)
82
84
86
88
90
92
94
96
6000
4000
2000
0
70
72
74
76
78
80
-2000
-4000
-6000
-8000
U.S. Merchandise
Trade Balance w/
Mexico
82
84
86
88
90
92
94
96
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
82
84
86
88
90
92
94
96
-1 0
-2 0
-3 0
-4 0
Percentage Change in
Value of the Mexican
Peso (per $)
-5 0
-6 0
-7 0
6000
4000
2000
0
70
-2 0 0 0
-4 0 0 0
-6 0 0 0
-8 0 0 0
72
74
76
78
80
U.S. Merchandise
Trade Balance w/
Mexico
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
82
84
86
88
90
92
94
96
-1 0
-2 0
-3 0
Cheaper peso means
* more imports from Mexico
* fewer exports to Mexico
==> larger U.S. Trade deficit
-4 0
-5 0
-6 0
-7 0
6000
4000
2000
0
70
-2 0 0 0
-4 0 0 0
-6 0 0 0
-8 0 0 0
72
74
76
78
80
U.S. Merchandise
Trade Balance w/
Mexico
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
-1 0
-2 0
-3 0
U.S. Surpluses
mean Mexican
deficits
-4 0
Percentage Change in
Value of the Mexican
Peso (per $)
-5 0
-6 0
-7 0
6000
4000
2000
0
70
-2 0 0 0
-4 0 0 0
-6 0 0 0
-8 0 0 0
72
74
76
78
80
U.S. Merchandise
Trade Balance w/
Mexico
82
84
86
88
90
92
94
96
Mexican Trade Deficits MUST BE
FINANCED with hard currency (U.S. $)
BUT, Greater Demand for U.S. Dollars ($)
MEANS
A Higher Value for the U.S. Dollar ($)
MEANS
A LOWER VALUE FOR THE PESO
In 1994 the economy
is perfectly set up for
another devaluation
of the Peso
Add the additional fuel of:
- An armed insurrection combined
with terrorism.
- The assasination of the leading
presidential candidate.
- Political scandals
- Kidnappings of prominent
businessmen
- A fixed nominal exchange rate.
- More financial transactions.
Mexico attempted a devaluation of 15%
on December 20, 1994
Speculative interests unloading the peso
in New York accelerated the decline
1.2
THE VALUE OF THE YEN
($/yen)
1
0.8
0.6
0.4
0.2
0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Year
3
THE VALUE OF THE DOLLAR
(yen/$)
2.5
2
1.5
1
0.5
0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Year
U.S. INFLATION (CPI) & U.S. INTEREST RATES (PRIME RATE)
(% annual change)
0.16
0.14
0.12
0.1
cpi %d
Prime
0.08
0.06
0.04
0.02
0
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Year
INTEREST RATES (PRIME RATE): U.S. and Japan
(% annual change)
0.16
0.14
0.12
0.1
Japan
U.S.
0.08
0.06
0.04
0.02
0
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Year
INFLATION (CPI): U.S. and Japan
(% annual change)
0.14
0.12
0.1
0.08
U.S.
Japan
0.06
0.04
0.02
0
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Year
JAPANESE INFLATION (CPI) & INTEREST RATES (PRIME RATE)
(% annual change)
0.12
0.1
0.08
interest
inflation
0.06
0.04
0.02
0
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Year
REAL INTEREST RATE: U.S. and Japan
(% annual change)
7
6
5
4
3
U.S.
Japan
2
1
0
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
-1
-2
Year
Difference in U.S. and Japanese Rates
(% annual change)
8
7
6
5
4
Inflation Dif
Interest Dif.
3
2
1
0
-1
-2
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
Year
Foreign Price /
value of the dollar
= U.S. price
1872.55 yen /
220.30 yen
1.0 $
= $8.50
U.S. Price * value of the dollar = Foreign price
$8.50
*
400 yen
1.0 $
= 3400 yen
Average Profit
= Price
- Unit cost
Price in US $- (Unit cost in Yen/ value of yen)
At 400 yen per dollar
$4.50 = $12.00 - (3000 yen / 400 yen per dollar)
At 400 yen per dollar
$2.00 = $12.00 - (3000 yen / 300 yen per dollar)
At 400 yen per dollar
-$3.00 = $12.00 - (3000 yen / 200 yen per dollar)
Alternative Sources of
Telephones: 1981
ROW
SOURCE
U.S.
CANADA
JAPAN
S. KOREA
1
Price
$8.50
C$9.60
Y1806.46
W5888.40
2
Exchange Rate (per $)
-
1.20
220.30
701
3
Price (in $)
$8.50
$8.00
$8.20
$8.40
4
Cheapest Alternative
Source (in $)
$8.00
$8.20
$8.00
$8.00
5
Opportunity Loss
(in $)
$.50
-$.20
$.20
$.40
SOURCING COSTS REFLECTING CHANGES IN
EXCHANGE RATES (per phone)
YEAR
U.S.
(1)
CANADA
(2)
JAPAN
(3)
S. KOREA
(4)
SAVINGS
(5)
1981 $8.50
$8.00
$8.20
$8.40
$.00
1982 $8.50
$7.78
$7.28
$7.86
$.22
1983 $8.50
$7.78
$7.61
$7.40
$.60
Savings From Three Types of Flexibility:
I. Opportunity saving buying from Canada instead of the U.S.
= 300,000 phones * ($8.50-$8.00 per phone)
=$150,000
II. Opportunity saving from one year rather than three year contracts
(which allows swithcing to lowest cost producere each year)
= 100,000 phones in 1982 * ($8.00-$7.28)
+ 100,000 phones in 1983 * ($8.00-$7.40)
=$132,000
III. Opportunity saving from storing (buying from Japan in 1982
to meet 1983 needs, even after $.07 costs of inventories)
=100,000 phones in 1982 * ($7.40-$7.28+.07)
=$5,000
TOTAL OPPORTUNITY SAVING = $287,000
INTEREST AND EXCHANGE RATE CHANGES
Start: Japanese invest 1000 yen in 1985 at 215.9 yen per dollar
with a gauranteed interest rate of 7.97%.
End: Japanese liquidate their investment at 178.55 yen in 1986
Calculation of gain:
1000 yen * 1
215.9
*1.0797 * 178.55 = 892.92 yen
Opportunity loss:
Could have earned 1064.7 yen by investing at home.
SAVINGS THROUGH
DIVERSIFICATION
YEAR Average Price
(1)
Average Saving
(2)= $8.50 - (1)
Total Saving over
100,000 Phones
(3) = (2)*100,000
1981 $8.275
$.225
$22,500
1982 $7.855
$.645
$64,500
1983 $7.8225
$.6775
$67,750
Total
Savings
$154,750
SPOT AND FUTURES MARKET PRICES FOR OIL: 1975-76
10
8.26
7.4
5
3.75
3.4
0
0
Nov\4
Dec\1
4.56
4.45
3.98
1.05
0.77
1975-1.95
\2
\3
\4
Jan\1
\2
\3
\4
\5
Fe b \ 1
\2
1976
-3.05
-4
-5
6.02
5.5
-4.6
-5.05
-5.4
-6.37
-7.75
-10
-12.05
-12.7
-13
-15