Michael M. Knetter UW-Madison School of Business Manufacturing Prospects and Midwest Public Policy Federal Reserve Bank of Chicago Real Effects of Currency Fluctuations
As quoted in the Wall Street Journal… Honda Motor claims that “every ¥en the dollar rises against the Japanese currency adds about $40 million to its profits.” Does this relationship make sense? Is this a big deal or a small deal?
Price and Output Response to a Depreciation of the Exporter’s Currency quantity ¥en/$ MC MR 1 q 1 p 1 optimal price and quantity rise as a result of depreciation of the exporter’s currency for a given MC MR 2 q 2 p 2
Profit Response to a Depreciation of the Exporter’s Currency quantity ¥en MC q 2 q 1 p 2 p 1 depreciation of exporter’s currency increases price, quantity, and profit