Question

Following an unanticipated dollar appreciation, would you recommend that a domestic manufacturing company such as Cummins Engine outsource some of its manufacturing abroad? No or Yes

Answer 1

Following an unanticipated dollar appreciation, I would definitely recommend a domestic manufacturing company Cummins Engine to outsource its manufacturing abroad. This is because rising dollar pushes up the prices of US goods in the foreign market making it less attractive but the goods manufactured abroad would be more attractive because of its low price.

Moreover, in the foreign country the engines are manufactured at a reasonable price, as the dollar revenue will translate into more units of foreign currency thus the US manufacturers end up paying less translating the payment in terms of dollar.

For instance, the manufacturing outsourced to India.

Cost of manufacturing XYZ component in India : 150 INR

Previously, $1 ~ 75 INR

So amount to be paid to manufacturer : $2

As the dollar appreciates, $1 ~ 80 INR

Now, amount to be paid to manufacturer, $1.88

So the US manufacturer end up paying less as the dollar appreciated translated the paymnet in terms of dollar.