MBA 6601, International Business

Duong Phan ID 258998

Unit IV Assignment

Part One

Your company is deciding to expand to the following countries, and you and two other

managers will have to visit these countries to set up operations. You have $1,500.00 to convert in

each currency.

Country/Currency USD value for 1 unit Method Exchange amount

of another currency

(as of 2/17/16)

Japanese Yen $0.008754 $1,500: 0.008754 Ұ 171,350.24

Euro $1.1159 $1,500: 1.1159 € 1,344.21

British pound $1.4398 $1,500: 1.4398 £ 1,041.8

Utilizing the same exchange rate, while you are visiting each of these countries, you have

to buy supplies/equipment for your operations; you want to determine what it is costing you in

U.S. dollars. Please compute the following:

Japanese Yen Computer Ұ167,000.00*0.008754 $ 1,461.92

Ұ167,000.00

Euro Desks & chairs €1,125.00*1.1159 $ 1,255.39

€1,125.00

British pound Printer £575.00 £575.00*1.4398 $ 827.89

Part Two

Pedro in Costa Rica wants to purchase some wild Atlantic salmon from Hans in Iceland.

The fish are purchased in Iceland’s currency, the krona. Pedro’s brother works in a bank and will

take care of the transactions free of charge. Pedro has 1,000,000.00 colones to start with. How

much krona does he have to work with? (There is no transaction fee, and shipping is not

calculated at this point).

Country/Currency USD $ value for 1 unit of Euro € value for 1 unit of

another currency (as of another currency (as of 2/18)

2/17/16)

Costa Rica Colon CRC $0.001909 €0.001745

Iceland Krona ISK $0.00788 €0.007062

Pedro uses CRC 1,000,000 to buy USD: 1,000,000: 0.001909= USD 1,909

Pedro uses USD 1,909 to buy ISK: 1,909*0.00788= ISK 242,258.88

The next day, Hans decides to purchase some bananas from his new trading partner in

Costa Rica. Han’s sister works for an import/export agency and can arrange the transaction in

euros with no fee. Hans takes all of the krona he received from Pedro and proceeds to convert his

currency to colones. How much colon does he have to work with? (Note: One country’s currency

experienced some weakness overnight.) List your steps and the results you achieved with each

step. Also, explain some factors that could cause the country’s currency to weaken.

Hans earned ISK 242,258.88 from selling salmon.

Hans uses ISK 242,258.88 to buy euros: 242,258.88*0.007062=€1,710.83221

Hans uses €1,710.83221 to buy CRC: 1,710.83221:0.001745= CRC 980,419.60

 Some factors that could cause the country’s currency to weaken:

Trade deficit: When the cost of a country's imports exceeds the value of its exports, the

demand for USD increases resulting in the increase of USD price and devalue of local currency.

Balance of payment (BOP): A statement that summarizes an economy’s transactions

with the rest of the world for a specified time period. When inflow of USD is less than the

outflow of USD, it leads to a shortage of USD and the price of USD increases.

Inflation: Inflation is defined as a sustained increase in the general level of prices for

goods and services. It is measured as an annual percentage increase. As inflation rises, every

dollar you own buys a smaller percentage of a good or service.

Tariff: A tax imposed on imported goods and services. Tariffs are used to restrict trade,

as they increase the price of imported goods and services, making them more expensive to

consumers. Tariffs provide additional revenue for governments and domestic producers at the

expense of consumers and foreign producers. They are one of the several tools available to shape

trade policy.

Government devaluates the nation’s currency to support export: In a global market,

goods from one country must compete with those from other countries. For example, if the value

of the euro decreases against the dollar, the price of the cars sold by European automakers in the

US, in dollars, will be less expensive than they were before.

The economic situation in the country: Economic conditions refer to the state of the

economy in a country. They change over time in line with the economic and business cycles, as

an economy goes through expansion and contraction. Economic conditions are considered to be

positive when an economy is expanding and are considered to be negative when an economy is

contracting. Recession can weaken the country’s currency.

 National debt high: When the national debt is high, a government has to pay for its debt

in USD leading to a high demand of USD and increased price of USD, which devalues the

country’s currency. More money is printed also leads to high inflation and the value of country’s

currency is decreased.

Part Three

Absolute advantage theory and competitive advantage theory: Both theories state that

labor productivity affects the trade pattern of a country and assume that labor is the only factor of

production.

Absolute advantage theory was first mentioned by Adam Smith in 1776 relating to

international trade. It stated that different countries produce a greater quantity of a good, product,

or service than others with cheaper price, using the same amount of resources. (Daniel, et al.

2015. p.236). A country’s advantage can be a natural advantage such as climate, soil, gold

mines… or acquired advantage such as product technology or process technology that enables a

country to produce a unique product which is easily distinguished from those of competitors

(Daniel, et al. 2015 p. 237). Japan has an absolute advantage in automobile technology.

For example:

Assumption for France Assumption for Italia

1. 100 units of resources available 1. 100 units of resources available

2. 5 units to produce 1 ton of cheese 2. 10 units to produce 1 ton of cheese

3. 10 units to produce 1 ton of ham 3. 8 units to produce 1 ton of ham

4. Uses half of total resources per 4. Uses half of total resources per

product when there is no trade with product when there is no trade with

Italia France
 France has the absolute advantage in producing cheese as it needs only 5 units of

resources to compare with 10 units of resources of Italia to produce 1 ton of cheese.

Italia has the absolute advantage in producing Ham as it needs only 8 units of resources to

compare with 10 units of resources of France to produce 1 ton of ham.

Without trade:

Product Cheese (tons) Ham (tons)

France 10 5

Italia 5 6.25

Total 15 11.25

Without trade, each country spends half of its resources to produce cheese and ham.

France produces 10 tons of cheese (50 units of resources/5 units of resources per ton of cheese)

and 5 tons of ham (50 units of resources/10 units of resources per ton of ham). Italia produces 5

tons of cheese (50 units of resources/10 units of resources per ton of cheese) and 6.25 tons of

ham (50 units of resources/8 units of resources per ton of ham). The total outputs of 2 countries

for cheese are 15 tons and ham are 11.25 tons.

With trade

Product Cheese Ham

France 20 0

Italia 0 12.5

Total 20 12.5
 With trade, each country will focus on producing the product which is its absolute

advantage. France has the absolute advantage in cheese, so it focuses on producing cheese with

maximum output is 20 tons (100 units of resources/ 5 units of resources per ton of cheese). Italia

has the absolute advantage in ham, so it focuses on producing ham with maximum output is 12.5

tons (100 units of resources/ 8 units per ton of ham).

With trade, both countries have benefited by increased product, for cheese, they have extra 5 tons

of cheese and 1.25 tons of ham for trading.

Comparative advantage is a theory created by David Ricardo, it says that “global

efficiency gains may still result from trade if a country specializes in what it can produce most

efficiently, regardless of other countries’ absolute advantage” ( Daniels, et al. 2015. p.239).

Assumption for France Assumption for Italia

1. 100 units of resources available 1. 100 units of resources available

2. 10 units to produce 1 ton of cheese 2. 4 units to produce 1 ton of cheese

3. 8 units to produce 1 ton of ham 3. 5 units to produce 1 ton of ham

4. Uses half of total resources per 4. Uses half of total resources per

product when there is no trade with product when there is no trade with

Italia France

Without trade:

Product Cheese (tons) Ham (tons)

France 5 6.25

Italia 12.5 10

Total 17.5 16.25

 Without trade, each country spends half of its resources to produce cheese and ham.

France produces 5 tons of cheese (50 units of resources/10 units of resources per ton of cheese)

and 6.25 tons of ham (50 units of resources/8 units of resources per ton of ham). Italia produces

12.5 tons of cheese (50 units of resources/ 4 units of resources per ton of cheese) and 10 tons of

ham (50 units of resources/5 units of resources per ton of ham). The total outputs of 2 countries

for cheese are 17.5 tons and ham are 16.25 tons.

With trade:

Product Cheese (ton) Ham (ton)

France 0 12.5

Italia 17.5 6

Total 17.5 18.5

With trade, Italia has absolute advantages in both cheese and ham. Both countries keep

the total output of cheese as 17.5 tons, which is the same as before trade. Italia uses only 70 units

of resources (17.5 tons* 4 units of resources= 70 units of resources) to produce 17.5 tons cheese,

the remained 30 units of resources are used to produce ham which gives out 6 tons of ham

(30/5=6). France doesn’t have the absolute advantage in both products, however, it can produce

ham more efficiently than cheese. France uses all of its resources to produce 12.5 tons of ham

(100/8=12.5). The total output of ham increases to 18.5 tons (12.5+ 6), which is 2.25 tons more

than before trade.

With trade, both countries have benefited by increased product.

 Reference

Business Dictionary. Retrieved from http://www.businessdictionary.com/

John D. Daniel, Lee H. Radebaugh, Daniel P. Sullivan (2015). International business:

Environments and Operations. 15th edition. Pearson Education.