In: Economics
Suppose you are the CFO of Toyota and that you manufacture your
cars in Japan and export the vehicles to the USA. Assuming your
current profit per car is $1,000 and you sell 10,000 this year,
please answer the following and show your computations:
- From a profitability point of view, do you generally
favor a strong or weak US Dollar versus the Japanese YEN?
Why?
- If the exchange rate is 1 US Dollar = 1.20 Japanese
YEN, what is your profit this year in YEN?
- If the YEN appreciates in value versus the Dollar,
would profitability increase or decrease?
Ans) From profitability point of view Japan will prefer US strong market the less there is variability in the market more will be the profit to Japan and profit of Japan will increase if the market is stable.
Exchange rate = $/ yen
1US = 1.20Yen
US/yen = 1.20/1
US = 12000000
And profit in Yen = 12000000/1.2
= 10000000( profit this year )
If yen appreciate in terms of US then the Japanese yen profit will decrease because now the commodity purchased in yen will decrease because of increase in price of commodity. When the exchange rate rises in the economy export become expensive and imports become cheaper because now the imported country have to give less price then exports this will shift the demand downward. With the appreciation of currency in the economy interest rate rises this will further increase the inflation in the economy. As above discussed the rise in price will decrease the demand of car in US market and this result in decreased in demand of car in US market.