Disequilibrium Due to Government Regulation (A) (B) (C) (D) Current Price Current Price Current Price Current Price P Supply P Supply P Demand P Demand Demand Demand Supply Supply Supply Limit Q Q Q Q

B A L N C E O F P Y M 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 Abroad Money

Price of a Dollar Price of Yen ¥/$ $/¥ $ in Foreign Exchange Mkt ¥ in Foreign Exchange Mkt

Value of the Mexican Peso in $

COUNTRY GDP per Person (1993) U.S. $24,580 Canada $18,940 Mexico $3,679 Argentina $7,505 Brazil $3,528 Chile $3,067 Cuba $1,959 Colombia $1,339 Japan $34,160 South Korea $7,368 China $1,738 Phillipines $791

Unit Labor Costs in Mexico (AER, May 1996

Percentage Change in Value of the Mexican Peso (per $)

U.S. Merchandise Trade Balance w/ Mexico

Trade Balance w/ Mexico Percentage Change in Value of the Mexican Peso (per $) U.S. Merchandise Trade Balance w/ Mexico

Trade Balance w/ Mexico Cheaper peso means * more imports from Mexico * fewer exports to Mexico ==> larger U.S. Trade deficit U.S. Merchandise Trade Balance w/ Mexico

Trade Balance w/ Mexico U.S. Surpluses mean Mexican deficits Percentage Change in Value of the Mexican Peso (per $) U.S. Merchandise Trade Balance w/ Mexico

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 ($) 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

THE VALUE OF THE YEN ($/yen) Year

THE VALUE OF THE DOLLAR (yen/$) Year

U.S. INFLATION (CPI) & U.S. INTEREST RATES (PRIME RATE) (% annual change) Year

INTEREST RATES (PRIME RATE): U.S. and Japan (% annual change) Year

INFLATION (CPI): U.S. and Japan (% annual change) Year

JAPANESE INFLATION (CPI) & INTEREST RATES (PRIME RATE) (% annual change) Year

REAL INTEREST RATE: U.S. and Japan (% annual change) Year

Difference in U.S. and Japanese Rates (% annual change) Year

Foreign Price / value of the dollar = U.S. price 1872.55 yen / 220.30 yen = $8.50 1.0 $ U.S. Price * value of the dollar = Foreign price $8.50 * 400 yen = 3400 yen 1.0 $

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) $2.00 = $12.00 - (3000 yen / 300 yen per dollar) -$3.00 = $12.00 - (3000 yen / 200 yen per dollar)

Alternative Sources of Telephones: 1981

SOURCING COSTS REFLECTING CHANGES IN EXCHANGE RATES (per phone)

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 *1.0797 * 178.55 = 892.92 yen 215.9 Opportunity loss: Could have earned 1064.7 yen by investing at home.

SAVINGS THROUGH DIVERSIFICATION

SPOT AND FUTURES MARKET PRICES FOR OIL: 1975-76 1976