EXCHANGE RATE CAR INDUSTRY G11-1 & G11-2 SAMUEL A. ABOKO GRAND CANYON UNIVERSITY: ECN-601 05/27/2019 Shifts in Supply and Demand Curves in The Exchange Rate Of Car IndustryThe company I ever work with was a car manufacturing industry which was based in the United Kingdom on the period of 2007 to 2009, which the United Kingdom depreciated its pound sterling to the United States dollar. The car manufacturing industry in the United is an export-driven industry with most of the produced cars are exported to the United States of American.
Therefore, if there is depreciation in the value of the pound sterling, United Kingdom exports will be lower, and make imports in the United Kingdom higher. The Effects of Exports on the Car IndustryThe car industry in the United Kingdom sold a car at (5,000 pounds sterling).In 2007, a price for a car was sold at ($7,500 (5,000*1.5). The pound sterling reduced means that the United States of Americans consumers seen United Kingdom cars are less more expensive.
This means that the market price of cars in the United Kingdom has gone down. And this implies that the demand curve shifts upward towards the right side.There will be negative effects of depreciation in the United Kingdom car industry who import their raw materials will go up when buying them. It is that when the industry imports car engines from the United States to manufacture cars will need to pay high prices. For instances, if the engine costs ($1,000 to import from the United States.In 2007, an engine cost ($666 therefore means $1,000 divided by 1.
5).In 2009, the industry will spend 909 pounds sterling (1,000 divided by 1.1) to purchase the same United States engine. Therefore, the profit margin reduces the manufacturer’s interest to supply the good have been fallen, and therefore, the supply curve will shift to the left side.Therefore, the general effect on the industry on supply and demand isTherefore, the general effect on the industry on supply and demand is illustrated in the diagram below.Price QuantityWhat Happened in Car Industry’s Price and Quantity by Making Specific References to Demand and Supply CurvesThe demand curve moves upwards to the right, and supply curve to the left, by making the general effect is that in the equilibrium, prices goes up. Therefore, the quantity goes down or goes up will come from the movement of demand and supply curves, where demand curve greater than the supply curve, quantity will increase but a situation where the demand curve moves less, the supply curve, the quantity will reduce. However, the quantity may increase or decrease depending on the movements of the demand curve and supply curve. There are two types of options for car industry in United Kingdom. In the first place, the industry can decrease the United States car price from ($7,500 to $5,500, that will help to increase the quantity sold, thereby increasing United Kingdom exports.Second, they can maintain the price at ($7,500 and make a bigger margin of gains.How do You Predict Future Changes in the Exchange Rate?According to Froeb, McCann, Shor and Ward (2016), there are four general methods of predicting future changes in the exchange rate;(1) Purchasing power parity (PPP)The theoretical law of one price, which states that identical goods in different countries should have identical prices. For instance, a car price in United Kingdom should be the same price in the United States of America which after accounting for the exchange rate, transaction and shipping costs are added.Purchasing power parity (ppp) approach says that the exchange rate will change to offset price changes due to inflation. For instance, if the United States are expected to increase by 6% over the next two years, and prices in United Kingdom to increase by 4%. Purchasing power parity approach will predict that United States would have to depreciate by exactly 2% and that will purge prices in both countries at the same level.(2) Relative Economic Strength Approach (RESA)The reason is that, a high growth of economic environment is more likely to attract investments from foreign investors. This means the investor would need to get that country’s currency, and it would add an increase in demand that would help that country currency to appreciate. Investors are always interested in environments where there are high interest rate and that too would increase demand for that country’s currency, thereby enabling the currency to appreciate.(3) Econometric Models (EM)It involves in understanding the factors that one thinks it affect the movement of a country’s currency and logically making a model that relates to these factors to match the exchange rate. Usually, the factors need to add economic theory behind their inclusion in that model.(4) Time Series Model (TSM)The reason behind using this method is because of the idea that past behavior and price patterns would be used to predict future price behavior and their patterns.In the nutshell, the main factors that brings changes in exchange rate in various nations are the differentials in inflation, differentials in interest rate, current accounts deficits, public debt, terms of trade and among others. However, car manufacturing industry had a negative effect because United Kingdom import raw materials from the United States where United Kingdom currency has been depreciated. And the exchange rate issue can be predicted by following the general four methods- (PPP, TSM, EM, and RESA). REFERENCE(S)Froeb, L.M., McCann, B, T., Shor, M., & Ward, M. R. (2016). Managerial economics: A problem solving approach (4th ed.). Boston, MA: Cengage Learning. ISBN. 139781305259331URL:
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