Global Expansion and Competitiveness

Exchange Rate Movements

• Exchange rate movements is one factor that makes international trade uncertain
• Exchange rate refers to the price of one currency relative to another
• Exchange rates fluctuate due to market forces, reflecting changes in supply and demand
• Changes in exchange rates impact businesses involved in exporting and importing

Appreciation and Revaluation

• Appreciation occurs when a nation's currency becomes stronger, so each unit buys more of another currency
• For example, the pound's value against the euro appreciated between the start and middle of 2015, £1 = €1.27 to £1 = €1.41, which is a 12.5% increase
• Some countries have a minority exchange rate and is fixed, which means it stays the same and does not falter
• Government intervention to raise a currency's exchange rate to reflect valuations is revaluation

Depreciation and Devaluation

• Depreciation happens when a nation's currency weakens, so each unit buys less of another currency
• As an example, after the June 2016 Brexit vote, the pound depreciated against the euro, dropping from £1 = €1.31 to £1 = €1.10 over a couple of months, a 16% decrease
• Devaluation occurs when a government chooses to weaken its currency's exchange rate when it's fixed

Impact of Exchange Rate Appreciation

• Changes in exchange rates impact the demand for exports and imports due to price fluctuations
• When the exchange rate rises from £1 = US$1.50 to £1 = US$2, UK exports become more expensive for US customers, decreasing demand
• When the exchange rate rises, the price in pounds for UK firms buying from the US falls, increasing demand for imports

Impact of Exchange Rate Depreciation

• A fall in the exchange rate result in the opposite effect on the demand for exports and imports
• When the exchange rate falls from £1 = US$1.50 to £1 = US$1.20, UK exports become cheaper for US customers, increasing demand
• If the exchange rate falls, the sterling price to the importer rises, and demand for imports will likely fall because they are more expensive

Significance of Changes in Exchange Rates

• Elasticity of demand determines how a currency depreciation effects businesses and products
• If demand for exports is price elastic, there will be a bigger percentage increase in the quantity demanded
• Demand for many Australian exports is price inelastic because exports are important commodities
• Appreciation caused by improvements in efficiency and productivity is easier for businesses to adjust to
• Appreciation due to speculation or weaknesses in other countries can make businesses uncompetitive

Fixed Contracts

• Fixed contracts are used by businesses to counter exchange rate fluctuations, reducing the impact of temporary changes
• Raw material prices are often set 12-18 months in advance
• Exporters reduce uncertainty using special fixed contracts to protect from dramatic exchange rate changes
• The impacts on business are delayed because of fixed constracts

Economic Risk

• Firms trading internationally risk long-term impacts from exchange rate movements
• Locating production in low-cost areas involves economic risk if the target country's currency appreciates
• In the 1990s, firms built factories in China due to low production costs, but the yuan's appreciation reduced these advantages
• Economic risk refers to the risk of future cash flows changing due to exchange rate fluctuations
• Managing economic risk involves analyzing political, regulatory, and cultural environments affecting the currency over time
• The US dollar is powerful and impacts international trade, so any movement in the dollar has an impact on international trade
• In 2015, the US dollar appreciated against other currencies as the economy recovered, impacting emerging market economies taking out loans in dollars
• Petrobras, the Brazilian state-owned oil company, struggled to repay dollar-denominated debts due to falling energy prices and the appreciating dollar

Skills Shortages and International Competitiveness

• Many industries require highly trained engineers, scientists, technicians or professionals to compete
• Long-term access to skilled and low-cost labor provides companies with a competitive advantage
• Companies expanding production abroad hope to improve or maintain their competitive advantages
• Governments define skills shortages differently to businesses
• Governments train and educate workforce to become relatively more competitive internationally
• Employers are concerned when they cannot fill specific vacancies or cannot do so at the right skill level
• Businesses in the USA, Australia, New Zealand, Canada, and the UK have been troubled by skills shortages, especially in manufacturing

Effects of skills shortages

• Businesses' international competitiveness may be threatened if they cannot recruit enough skilled workers
  • Shortages of skilled workers in a labor market increases wages due to restricted labor supply
• Federal Reserve Survey in 2017 found there were labor shortages all over the USA and business had to pay higher wages
• 73% of businesses found it difficult to attract qualified workers
• The quality of output will be negatively affected if businesses are unable to attract high-quality skilled workers
• Firms may be forced to recruit unqualified workers lacking in skills and experience, which could threaten business's reputation
• Shortages of skilled labor can result in lower levels of productivity
• Production delays happen because it takes businesses longer to recruit skilled labour
  • Businesses may have to stop production altogether if it cannot recruit enough skilled workers or be using workers who do not have the required skill levels
  • Loss of business happens if labor shortages continue, and customers may find alternative suppliers if they are kept waiting too long
  • Once a customer is lost to a rival, it is very difficult to tempt them back, which could threaten the survival of a business in the long term

Understand how exchange rate movements impact international trade. Learn about currency appreciation, revaluation, depreciation, and devaluation. Explore the effects of fluctuating exchange rates on businesses involved in exporting and importing.