Questions
10-1. Do you think Venezuela should drop its currency, the VEF, and adopt the U.S. dollar? Why
or why not?
10-2. If Venezuela does not replace the VEF with the dollar, what do you think will happen to the
Venezuelan economy, inflation, and the exchange rate?
TEACHING TIPS: Carefully review the PowerPoint slides for Chapter Ten and select those
you find most useful for enhancing your lecture and class discussion. For additional visual
summaries of key chapter points, also review the figures, tables, and maps in the text.
Current foreign currency values and other related information can be found on the Web site
http://finance.yahoo.com. Have students visit the site and report back on its usefulness.
CLOSING CASE: Welcome to the World of Sony—
Unless the Falling Yen Rises
(or Falls) Again
This case reviews the impact of the yen on Japan’s Sony. In Sony’s early years (1946-1970),
they had the luxury of operating with a weak yen. They also received support from the
government and expanded rapidly. This era was followed by the First Endaka (“high yen”). This
period (1970-1993) saw the yen very strong against the dollar due to a weak U.S. economy, the
Persian Gulf War, a rise in interest rates in Japan, and lack of agreement on the condition of the
yen among the G8. A Second Endaka hit in1995. Japanese companies were having trouble
remaining competitive and cut costs to do so. The Japanese economy was in recession and the
Bank of Japan dropped interest rates, which reduced the value of the yen. Although Sony
continued to innovate during these decades, competition from Korean companies, like Samsung
and LG, heated up. During the economic crisis, the yen became a safe-haven currency. Sony
continues to be geographically diversified and take advantage of production outside of Japan.
With the strong yen, Sony’s financial statements were negatively impacted and competition
continued. Sony has lots of strengths but continues to face challenges. There seems to be a
reversal of fortunes with the election of Prime Minister Shinzo Abe in 2012. The yen had fallen
by more than 20 percent since Abe took office helping Sony doubled its annual profit estimates
due partly to the falling yen.
Questions
10-3. Why do you think it is important for Sony to manufacture more products in the United
States and Europe and to also buy more from suppliers in other countries in Asia?
10-4. What are the major forces that affected the Japanese yen over the years? What factors do
you think are important to monitor as you try to forecast what will happen to the value of the yen
in the future?
The world economy, particularly the U.S. economy, impacts the strength or weakness of the yen.
The period between 1970 and 1993 saw the yen very strong against the dollar due to a
ADDITIONAL EXERCISES: Exchange-Rate Determination
Exercise 10.1. In the early 1990s, the Canadian and U.S. dollars were close to par. At the
end of June 2003, the Canadian dollar was worth about U.S. $0.7374. By March 2006, the
Canadian dollar was worth about U.S. $.8635. Ask students to discuss the reasons they
believe the Canadian dollar lost so much ground against its American counterpart between
1990 and 2003. Be sure they raise factors such as the implementation of the North American
Free Trade Agreement and the separatist movement in Quebec. Now, ask them why the
Canadian dollar strengthened against the U.S. dollar from 2003 to 2006. Finally, note the
importance of U.S. trade to the Canadian economy and ask students if they think Canada
should consider “Americanizing” (pegging) its dollar to its neighbor’s. Why or why not?
(LO: 2, Learning Outcome: To discuss the major exchange-rate arrangements that countries
use, AACSB: Dynamics of the Global Economy)
Exercise 10.2. Use the IMF International Financial Statistics to identify countries that use
the SDR as a basis for the value of their currencies and those that use the euro. Then engage
the students in a discussion as to why certain countries have chosen to use the SDR while
others have chosen the euro. In what ways are the SDR and the euro similar? In what ways
are they different? (LO: 1, Learning Outcome: To describe the International Monetary Fund
and its role in the determination of exchange rates, AACSB: Multicultural and Diversity
Understanding.)
Exercise 10.3. Historically, the International Monetary Fund has prescribed strict monetary
policies and reduced government spending for developing countries that sought aid in
dealing with currency crises. Ask students to debate the wisdom of the IMF’s approach. Do
they believe it was effective? Then ask the students to suggest ways in which the IMF might
change its approach in the future. Be sure they consider the implications of their suggestions
for international businesses. (LO: 1, Learning Outcome: To describe the International
Monetary Fund and its role in the determination of exchange rates, AACSB: Communication
Abilities.)
Exercise 10.4. Have students look up Big Mac prices in Table 9.2. Which is the most
expensive country in which to buy a Big Mac? Which is the least expensive? What factors
other than currency overvaluation or undervaluation might contribute to these differences?
Based on the theory of purchasing-power parity, what is likely to happen to these currencies
against the dollar in the next few years? (LO: 6, Learning Outcome: To explain how
exchange-rate movements influence business decisions, AACSB: Dynamics of the Global
Economy.)