Questions for Discussion
1. At this point, you have read several chapters commenting on the impact on corporate profit of currency flows among countries. The common currency of Europe, i.e. the euro, is probably the best example of regional economies attempting to create a common currency. Give a very brief list of 3 to 5 reasons why the leaders of France and Germany favored the creation of a common currency.
As two of the larger economies in the European Union, France and Germany had the most to gain from the creation of a common currency. The most important factor for a common currency is the reduction of cost in international trade between nations using the currency. The cost of changing currency is removed, thus saving money for both importers and exporters. Similarly, a common currency promotes stability. Since the value of currency no longer fluctuates within the EU, managers no longer need to worry whether they will have the necessary funds to meet obligations if there is a sudden change in an exchange rate. Finally, tying the currency of several nations together creates a larger economy behind that currency. This in turn should make the currency more powerful in international financial markets.
2. What is the ‘gold standard’ and why did it collapsed? In other words, what are some of the plus and minuses of a ‘fixed exchange rate’ system.
The gold standard tied a nation’s currency to the amount of gold they held in reserve. This was beneficial as it gave currency a real world value and guaranteed that currency exchange was relatively simple and predictable. Unfortunately, the gold standard began to break down when nations faced with growing debt began to print more money than gold held in reserve. This created a situation where the value of currency could no longer be backed by gold reserves. In this situation, it is possible for investors to begin trading in their currency for gold and, essentially, bankrupt a nation.
3. After listening/reading our media story for Lesson/chapter 10, you will know something about the predictions for the U.S. economy made at the start of 2015. We are ‘just about at the mid-point’ of 2015—how are the predictions doing, are they on target? Are they accurate? Will the managers in U.S. corporations be giving attention to such predictions? Why or why not?
For the most part, the pundits have been right concerning the performance of the US economy in 2015. Some things, such as mortgage rates and the stock market, have been fairly stable as compared to the end of 2014. Neither of those have seen much of an uptick, and, at 17,500, the Dow Jones is slightly down. That being said, inflation is low, unemployment is still on the way down, and GDP appears to be on the rise. In general, I think US corporations will pay attention to these predictions and invest in a stronger US economy.
Wild, J. & Wild, K. (2013). International Business: The Challenges of Globalization. (7th ed.). Upper Saddle River, NJ: Pearson.