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Lecture 11

BNAD 100 Lecture 11: Session 11--Global Economy

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Business Administration
BNAD 100
Rob Mateucci

Session 11—Global Economy I. Global Economy = the changes in economic conditions/policies can have a significant impact on the economic system across countries and on companies doing business internationally • Mutually interrelated business practices • Potential Impacts: 1. Changes in foreign currency relative to the US $ can have a major impact on trade • The US has largest economy in the world and has remained relatively stable over decades • Why it's used as a benchmark for other currencies • Ex: the Mexican peso has devalued vs the US $ by -30% over the past 5 years, from 13.2 pesos to the $ in April 2012 to 18.7 today • It takes 5 pesos more today for every US $ (it costs more pesos) • Ex: A car manufactured in the U.S. and sold in Mexico at the equivalent of $25,000 US $ would have cost 330K (the exchange rate) MX pesos in 2012, and today, would require 470K MX pesos, making it much more expensive for a person to buy a US auto in Mexico--has a significant impact for you personally as a consumer • $25K * 13.2 = 13.2 MX 330K • $25K * 18.7 = 18.7 MX 470K • This, in turn reduces exports of US goods into Mexico (because its more expensive). In contrast, products produced in Mexico and sold in the US are cheaper, increasing imports to the US • Currency has a major impact on trade, • As a result, Mexico has a trade surplus of $63 billion with the US • In large part because of the devaluation of the US $ II. Reported financial performance of US companies doing business abroad is also impacted by changes in exchange rates • They report their financial statements in US equivalent dollars •When this is done, there's a big hit to international companies • Will set their goals in US equivalent dollars to make up for the differences, will also increase production • Strengthening of US $/ change in exchange rate has a significant impact on US companies doing their business abroad EX: If a US company earned 1 million MX pesos in profit in 2012, this would have translated to $75,750 US profit; in 2017, 1 million MX pesos in profit would be worth $53,500 today •MX 1000000 / 13.2 = $75,750 •MX 1000000/18.7 = 53,500 Over the past 2 years, the US $ has generally strengthened vs most major foreign currencies (Euro, UK pound, Chinese Yuan), which has negatively impacted reported earnings for US companies doing business abroad Volatility in the price of oil($ per barrel) drives revenue up or down in heavy oil-producing nations, such as Russia and Venezuela; price of oil dropped from an average of $110 per barrel in 2014 to $44 in 2016; has since stabilized in the $50’s Increases in US interest rates can draw foreign investment for those seeking higher returns Changes in trade agreements between countries can have an impact on the flow of goods and services between countries and the GDP trends of involved regions(eg Brexit, NAFTA) Price of oil also affects the price of plastic resin, and other goods W/Brexit •It's NOT an isolated event; will have an effect on other global economies Development of Global Economy In the 70s and 80s, each country had its own currency and operated independently of the economic actions of other countries and companies • Most companies operated in a similar fashion, with "international" operations in each major country • As a result, there was very little sharing of resources or ideas across countries/companies Entering the 1990s, there were two fundamental shifts in market conditions: • The expansion of the internet, providing open data/communication in
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