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Chapter 30: Problem 6

(Related to the Chapter Opener on page 1058 ) An article in the Wall Street Journal in June 2017 began with this observation: "The euro soared to its biggest one-day gain against the dollar in a year." Bayer AG sells Coppertone sunscreen in the United States. If Bayer produces Coppertone in the United States and sells it only in the United States, would an increase in the value of the euro against the dollar affect the company's profit from selling Coppertone? Briefly explain.

Short Answer

Expert verified
No, an increase in the value of the euro against the dollar won't affect Bayer AG's profit from selling Coppertone in the United States, because both the production and the sales are localized within the United States, and not subject to exchange rate fluctuations.

Step by step solution

01

Identify Company Operations

Bayer AG produces and sells Coppertone sunscreen in the United States only. Therefore, the operations are localized and no direct import or export happens in terms of this product.
02

Consider the currency change

The euro has increased in its value against the dollar. This means that one euro can now buy more dollars than before. But this situation doesn't immediately affect Bayer's operations with Coppertone as those are based in the U.S.
03

Assess Profit Impact

As Bayer AG is operating Coppertone locally within United States, the increase in the euro value doesn't directly affect its profits from selling Coppertone. The cost of production and sales are all in dollars, no exchange rate comes into picture here. Their profits remain in dollars and are not immediately subject to exchange rate fluctuations.

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Most popular questions from this chapter

The United States and most other countries abandoned the gold standard during the \(1930 \mathrm{~s}\). Why would the 1930 have been a particularly difficult time for countries to remain on the gold standard? (Hint: Think about the macroeconomic events of the \(1930 \mathrm{~s}\) and about the possible problems with carrying out an expansionary monetary policy while remaining on the gold standard.)

What is the theory of purchasing power parity? Does the theory give a complete explanation for movements in exchange rates in the long run? Briefly explain.

The Economist observed, "In Argentina, many loans were taken out in dollars: this had catastrophic consequences for borrowers once the peg collapsed." What does the article mean when it says that Argentina's "peg collapsed"? Why was this collapse catastrophic for borrowers in Argentina who had taken out dollar loans?

In December \(2016,\) you needed 83 percent more pesos to buy one U.S. dollar than you had needed in December 2004\. Over the same time period, the consumer price index in Mexico increased 57.8 percent, and the consumer price index in the United States increased 26.7 percent. Are these data consistent with the theory of purchasing power parity? Briefly explain.

(Related to the Apply the Concept on page 1071 ) An article on usatoday.com included the following two observations: First, "Chinese companies and individuals have begun to invest more heavily outside the country." Second, "The yuan has dropped nearly 7 percent against the dollar so far this year. The Chinese government has responded by draining its foreign exchange reserves to buy yuan, hoping to slow the currency's fall." a. Is there a connection between Chinese companies and individuals investing more heavily outside the country and the drop in the yuan? Briefly explain. b. Why might the Chinese government want to slow the fall in the yuan? c. Why would the Chinese government have to drain its foreign exchange reserves to slow the fall in the yuan?
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