1. 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

2. 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

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

4. Value of the Mexican Peso in $

5. 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

6. Unit Labor Costs in Mexico (AER,
May 1996

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

8. U.S. Merchandise
Trade Balance w/ Mexico

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

10. 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

11. 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

12. 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

13. In 1994 the economy
is perfectly set up for another devaluation
of the Peso

14. 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.

15. Mexico attempted a devaluation of 15%
on December 20, 1994
Speculative interests unloading the peso
in New York accelerated the decline

16. THE VALUE OF THE YEN ($/yen)
Year

17. THE VALUE OF THE DOLLAR (yen/$)
Year

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

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

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

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

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

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

24. Foreign Price / value of the dollar = U.S. price
yen / yen = $8.50
1.0 $
U.S. Price * value of the dollar = Foreign price
$ * yen = yen
1.0 $

25. Average Profit
= Price Unit cost
Price in US $- (Unit cost in Yen/ value of yen)
At 400 yen per dollar
$4.50 = $ (3000 yen / 400 yen per dollar)
$2.00 = $ (3000 yen / 300 yen per dollar)
-$3.00 = $ (3000 yen / 200 yen per dollar)

26. Alternative Sources of Telephones: 1981

27. SOURCING COSTS REFLECTING CHANGES IN EXCHANGE RATES (per phone)

28. 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 * ($7.40-$ )
=$5,000
TOTAL OPPORTUNITY SAVING = $287,000

29. INTEREST AND EXCHANGE RATE CHANGES
Start: Japanese invest 1000 yen in 1985 at yen per dollar
with a gauranteed interest rate of 7.97%.
End: Japanese liquidate their investment at yen in 1986
Calculation of gain:
1000 yen * * * = yen
215.9
Opportunity loss:
Could have earned yen by investing at home.

30. SAVINGS THROUGH DIVERSIFICATION

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