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Guess Shifts Apparel-Making to Mexico From Los Angeles ...

[Wall Street Journal, January 14, ????]

““Jeans maker Guess, Inc., dogged Jeans maker Guess, Inc., dogged by allegations of illegal labor by allegations of illegal labor practices, is quietly moving most practices, is quietly moving most of its U. S. manufacturing to of its U. S. manufacturing to Mexico and other countries south Mexico and other countries south of the border.”of the border.”

Guess Shifts Apparel-Making to Mexico From Los Angeles ...

[Wall Street Journal, January 14, 1997]

““Jeans maker Guess, Inc., dogged Jeans maker Guess, Inc., dogged by allegations of illegal labor by allegations of illegal labor practices, is quietly moving most practices, is quietly moving most of its U. S. manufacturing to of its U. S. manufacturing to Mexico and other countries south Mexico and other countries south of the border.”of the border.”

Guess Shifts Apparel-Making to Mexico From Los Angeles ...

[Wall Street Journal, January 14, 1997]

“… “… the percentage of Guess the percentage of Guess garments sewn in Los Angeles will garments sewn in Los Angeles will drop to 35% next month from 75% drop to 35% next month from 75% five months ago. Mr. Marciano five months ago. Mr. Marciano said the shift was mainly a said the shift was mainly a ‘commercial decision’ to ‘stay ‘commercial decision’ to ‘stay competitive’ and ‘lower costs.’competitive’ and ‘lower costs.’

Guess Shifts Apparel-Making to Mexico From Los Angeles ...

[Wall Street Journal, January 14, 1997]

““Mr. Marciano said Guess saves Mr. Marciano said Guess saves $1.50 to $2 a garment by sending $1.50 to $2 a garment by sending cut fabric to five sewing factories cut fabric to five sewing factories in Mexico as well as plants in Peru in Mexico as well as plants in Peru and Chile. He declined for and Chile. He declined for competitive reasons to discuss the competitive reasons to discuss the total production cost of a garment.total production cost of a garment.

Guess Shifts Apparel-Making to Mexico From Los Angeles ...

[Wall Street Journal, January 14, 1997]

““Unite estimates that less than $5 Unite estimates that less than $5 of the cost of a $48 pair of jeans of the cost of a $48 pair of jeans goes for fabric and labor. Guess goes for fabric and labor. Guess said its manufacturing shift affects said its manufacturing shift affects ‘several million units a year’ with a ‘several million units a year’ with a wholesale value of $300 million to wholesale value of $300 million to $325 million.”$325 million.”

The Determination of Exchange Rates

[Shapiro - Chapter 2]

Problems – Chapter 2

2.2 2.3 2.5

Foreign Exchange Rates

Exchange Rate: “number of units of one currency that can be purchased for one unit of another currency”

Exchange Rate

“… market-clearing prices that equilibrate supplies and demands in foreign exchange markets.”

Exchange Rate Terminology

Revaluation - increase in stated par value of a pegged currency

Devaluation - decrease in stated par value of a pegged currency

Exchange Rate Terminology

Depreciation - loss in value of afloating currency

Appreciation - gain in value of a floating currency

Exchange Rate Terminology

Spot Rate - price of foreign exchange with same day payment

Forward Rate - rate quoted today for delivery at a fixed future date (30, 90, 180 days)

Fluctuating Value of the Yen[¥ per $,1954 - 2015]

Foreign Exchange Example[“Let’s do lunch!”]

$1 = Lit. 1.680 (Jan., 1994) Lit. 51.500 / 1.680 = $30.65 $1 = Lit. 1.600 (June 1994) Lit. 51.500 / 1.600 = $32.19 $1.54 / $30.65 = +5%

Exchange Rate Impact

Profit in Lire

Exchange Rate

Profit in $US

Exchange Rate Impact

Profit in Lire

Exchange Rate

Profit in $US

500,000,000 1,680 297,619

Exchange Rate Impact

Profit in Lire

Exchange Rate

Profit in $US

500,000,000 1,680 297,619

500,000,000 1,600 312,500

Exchange Rate Impact

Profit in Lire

Exchange Rate

Profit in $US

500,000,000 1,680 297,619

500,000,000 1,600 312,500

500,000,000 1,790 279,330

World Economic Forum, 2013-14Most Competitive Economies

World Economic Forum, 2013-14Most Competitive Economies

6. Sweden6. Sweden 7. Hong Kong7. Hong Kong 8. Netherlands8. Netherlands 9. Japan9. Japan 10. 10. United KingdomUnited Kingdom

World Economic Forum, 2013-14Most Competitive Economies

1. Switzerland1. Switzerland 2. Singapore2. Singapore 3. Finland3. Finland 4. Germany4. Germany 5. United States5. United States

6. Sweden6. Sweden 7. Hong Kong7. Hong Kong 8. Netherlands8. Netherlands 9. Japan9. Japan 10. 10. United KingdomUnited Kingdom

Changing Exchange RatesChanging Exchange Rates

Foreign currency appreciation (depreciation) is computed as the fractional increase or decrease in the dollar value of a foreign currency.

“Two-Percent Bag”

Important topics Essential Calculations Potential Exam Questions

Changing Exchange Rates[Appreciation of the Pound]

0

01)(

e

eeonAppreciati

Changing Exchange Rates[Appreciation of the Pound]

%95.137188.1$

7188.1$9586.1$

)(

0

01

onAppreciati

e

eeonAppreciati

Changing Exchange Rates[Depreciation of the Dollar]

1

10($)e

eeonDepreciati

Changing Exchange Rates[Depreciation of the Dollar]

1

10

0

01

($)

1

11

($)

e

eeonDepreciati

e

eeonDepreciati

Changing Exchange Rates[Depreciation of the Dollar]

%07.1258.0

58.051.0($)

7188.11

7188.11

9586.11

($)

onDepreciati

onDepreciati

Collapse and Recovery of the S. Korean Won, 1997-2014!

Exchange Rate Impact

Cost in Won(W)

Exch. Rate W/$1

Cost in $US

500,000,000 900 555,555

500,000,000 1,700 294,118

500,000,000 1,202 415,973

500,000,000 1,000 500,000

Currency Boards

No central bank; no discretionary monetary policy

Currency is convertible at a fixed rate into a foreign reserve currency, frequently the U. S. $

Board holds foreign securities as reserves; 100%+

Dollarization

Replacement of the local currency with the U. S. dollar

Panama (1904); Ecuador (2000) Expectation of price stability Sacrifice of national identity and

pride

Determining Exchange Rates

Economic Factors Political Factors Social Factors

Economic Factors

Relative rate of inflation Interest rate differentials Economic growth Central bank behavior

Political Factors

Government stability Government spending Taxation

Social Factors

Population growth Cultural values

–Health care

–Education

–Retirement

Social Factors

“According to the latest Istat statistics, the median age of marriage in Italy was 32 years for men and 30 years for women. In recent years, the average age has increased by 4 years for men and 6 years for women.”

• La Republicca, Summer, 2006

Problems – Chapter 2

2.2 2.3 2.5

Shapiro: Problem 2.2.a

2002: US$ 1 = ¥ 125 2006: US$ 1 = ¥ 115 a. Dollar value of ¥ 1 in 2002;

2006? 2002: US$ 1 ÷ ¥ 125 = $0.008 2006: US$ 1 ÷ ¥ 115 = $0.0087

Shapiro: Problem 2.2.b

b. % change in $ value of the ¥ between 2002 and 2006?

(e1 – e0) ÷ e0

(.0087 – .008) ÷ .008 = +8.75%

Shapiro: Problem 2.2.c

c. % change in Yen value of the US$ between 2002 and 2006?

(1/e1 – 1/e0) ÷ 1/e0

(1/.0087 – 1/.008) ÷ 1/.008 = (115 – 125) ÷ 125 = -8.0%

Shapiro: Problem 2.3

February 1: € = $1.2966 May 1: € = $1.3634 Has the Euro (€) appreciated or

depreciated against the dollar? By what percentage has the Euro

appreciated or depreciated?

Shapiro: Problem 2.3

Appreciation (€): (e1 – e0) / e0 = ?

(1.3634 – 1.2966) / 1.2966 = +5.15%

Depreciation ($): (e0 – e1) / e1 = ?

(1/1.3634 – 1/1.2966) / 1/1.2966 = -4.9%

Shapiro: Problem 2.5

3/29/07: Rupee(Rs) = $0.02327 3/30/07: Rupee(Rs) = $0.02298 Depreciation of the Rupee? (0.02298 – 0.02327) / 0.02327=

-1.25%

Shapiro: Problem 2.5

3/29/07: Rupee(Rs) = $0.02327 3/30/07: Rupee(Rs) = $0.02298 Appreciation of the Dollar? (1/0.02298 – 1/0.02327) /

1/0.02327= +1.262%