Trade Deficits and Exchange Rates
From the Wednesday, December 11 issue of The Wall Street Journal: For
those of you who include Ross, Westerfield, and Jordan's chapter on International
Financial Management, page A2 of this issue includes an excellent article
on the relatively large trade deficit experienced in the third quarter
of 1996. Specifically, the article notes that the current account deficit
rose to $33.83 billion from $28.58 billion in the previous quarter, and
provides some possible explanations.
I have found that, for many students, trade deficit reports are lot
like daily reports of the DJIA -- students have a general (albeit fuzzy)
understanding of the figures, but have little insight into their importance
to decision-makers. Consider the following discussion questions:
What is the expected relationship between trade deficits and foreign
exchange rates?
Given the answer to the first question, how do benefits affect the cash
flows of a U.S. firm doing business with overseas firms?
How might financial decision-makers reduce the uncertainties related
to exchange rate fluctuations?
Questions like these force students to think more deeply about the relationships
between macroeconomic variables and financial decision-making at the firm
level. Additionally, the questions serve to open the door for more in-depth
discussions (if you are so inclined) of balance-of-payments accounting,
the foreign exchange markets, and corporate risk management/hedging techniques.
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