Question

 

On October 10, 2019, the exchange rate for the US Dollar vs. the Swedish Krona was $1 = SEK 9.95. Over the following year, the US Dollar weakened vs. the Swedish Krona and the exchange rate was $1 = SEK 8.78 on October 10, 2020. Imagine you are an executive at a Swedish company that manufactures all of its products in Sweden. You are thinking of expanding to the United States. These two questions affect of the weakening of the US Dollar vs. the Swedish Krona on the company's expansion.

a) Would your company be more likely or less likely to build your own distribution center in the United States?

b) How would the exchange rate affect the prices of your products sold in the United States? (Remember they are manufactured in Sweden.)

Answer 1

a) Would your company be more likely or less likely to build your own distribution center in the United States?

Answer: Since $1=SEK 9.95 in 2019 and $1=SEK 8.75 in 2020.

It means the Swedish Krona has appreciated vis-à-vis US$ and US$ has depreciated vis-à-vis Swedish Krona. Generally, the appreciation of a currency and depreciation of a currency affects the prices of the goods and services produced in both countries and also affects the import and export prices of the traded goods between the two countries.

Because of the appreciation of the Swedish Krona vis-à-vis US$, the prices of the imported goods in the USA will become expensive, a rise in prices of the imported products from Sweden in the USA market will lead to a reduction in the demand for the Swedish products. A reduction in demand will discourage the Swedish company to build a distribution center in the USA. Hence the appreciation of the Swedish krona will discourage the company to build its distribution center or it is less likely that they would build their own distribution center in the United States.

b) How would the exchange rate affect the prices of your products sold in the United States? (Remember they are manufactured in Sweden.)

As the Swedish Krona has been appreciated vis-à-vis US$, the exports of goods produced in Sweden to the United States will become expensive. It means the Swedish manufactured goods in the US market will become expensive. The rise in prices of Swedish goods leads to a fall in the demand for Swedish goods in the US market and this will lead to a reduction of demand for Swedish goods in the USA market.

For the United States because of the depreciation of their currency US dollar, their imports from Sweden will become expensive and rise in prices of the imported products will lead to fall in aggregate demand for Swedish goods. Hence, because of the appreciation of the Swedish Krona, the prices of the products sold in the United States will increase.