ABDM3233 International Business Planning

Tutorial 7
Chapter 10 International Money System
Discussion Questions
1. What are the key differences between the concepts of devaluation and
revaluation?
Devaluation is the intentional lowering of a currencys value by a nations
government. It lowers the price of a countrys exports and increases the price of
imports. Devaluation reduces buying power.
Revaluation is the intentional raising of a currencys value by a nations
government. It increases the price of a countrys exports and lowers the price of
imports. Revaluation boosts buying power.

2. Briefly describe how exchange rates influence business activities.

Answer: Movement in a currency's exchange rate affects the activities of both domestic and
international companies. For example, exchange rates influence demand for a company's
products in the global marketplace.
A country with a currency that is weak (valued low relative to other currencies) will see a
decline in the price of its exports and an increase in the price of its imports. Lower prices
for the country's exports on world markets can give companies the opportunity to take
market share away from companies whose products are priced high in comparison.
Furthermore, a company improves profits if it sells its products in a country with a strong
currency (one that is valued high relative to other currencies) while sourcing from a country
with a weak currency. For example, if a company pays its workers and suppliers in a falling local
currency and sells its products in a rising currency, the company benefits by generating revenue
in the strong currency while paying expenses in the weak currency. Yet managers must take care
not to view this type of price advantage as permanent because doing so can jeopardize a
company's long-term competitiveness.
Exchange rates also affect the amount of profit a company earns from its international
subsidiaries. The earnings of international subsidiaries are typically integrated into the parent
company's financial statements in the home currency. Translating subsidiary earnings from a
weak host country currency into a strong home currency reduces the amount of these earnings
when stated in the home currency. Likewise, translating earnings into a weak home currency
increases stated earnings in the home currency.

3. Define and explain Purchasing Power Parity.

Purchasing power parity (or PPP) is the relative ability of two countries currencies to buy the
same basket of goods in those two countries.
PPP considers price levels in adjusting the relative values of two currencies.
Economic forces push a market exchange rate toward that calculated by PPP or an
arbitrage opportunity arises.
4. What are the effect of inflation on purchasing power parity?
Inflation erodes a currencys purchasing power.
If money is injected into an economy that is not producing greater output, a greater amount of
money is spent on a static amount of products. Demand for products soon outstrips their supply,
prices rise, and inflation then erodes/reduce purchasing power.

CASE STUDY PRACTICE

1. What do you think were the main factors involved in Toyotas decision to undertake
Foreign Direct Investment (FDI) in Australia rather than build its hybrids in Japan?
(10 marks)
- Strength of Australian dollar + explanation
- Australian government initiative through Green Car Innovation Fund + explanation
*
*

(2) main factors above + relevant explanation = 5 marks each

Or any relevant answer with good justification will be considered

2. Why do you think Toyota decided to adapt the existing plant in Melbourne rather than
build one from the ground up elsewhere in Australia? List THREE (3) reasons and
explain your answer.
(15 marks)
a) Because it is partly funded by taxpayers trough a $63 million payment from Green
Car Innovation Fund
b) injection of cash from the local Victorian administration
c) it is more cost effective to expand existing plant than to build new plant
*
*

(3) reasons above + relevant explanation = 5 marks each

Or any relevant answer with good justification will be considered

3. What do you think the decision to manufacture in Australia rather than in its domestic
factories will do to the companys reputation at home? How much attention do
international customers pay to the location where their automotive are assembled?
(10 marks)

* Relevant point of views/answers with acceptable explanation and justifications will be

considered = 5 marks for each part
4. What do you see as the pros and cons of Toyotas approach to managing FDI? (5 marks)
* (1) pros + brief explanations = 2.5 marks
* (1) cons + brief explanation = 2.5 marks