None of our client companies operate in a foreign country. They don’t sell into a foreign market. Nor do they manufacture in a foreign market. So we will use a hypothetical manufacturing company, Daewoo, for the assignment.
Daewoo is an American automobile manufacturing company that makes cars in the U.S. and sells in the U.K. market. Assume that a majority of its revenue comes from the U.K. market. Read the attached article, and answer the following questions.
They increased it by half a percentage point to 2.25, which is the highest it has been since 2008.
What is the purpose of the policy move, and what is its risk?
They want to lessen the strain of the higher cost of living. A recession still seem inevitable due to the current economic situation of the country.
How would it impact Daewoo’s profits?
Right now the economic situation is still so poor, so I do not see any reason why this policy move would have any major positive impacts on their profits.
What should the company do?
The company should prepare for a recession and look for ways they could improve their current situation after the recession.
The pound has been decreasing in value to its weakest level since 1985.
What would that mean for Daewoo’s profits?
As long as they keep their market in England it should not impact local business too much but it could increase buyers from America because of the value of the pound, as long as there is no purchasing power parity.
What should the company do?
If there is no PPP they should definitely implement one to compensate for the exchange rate. At this time they could also experiment and see how these price changes impact their profits.
What if, instead, Daewoo made cars in the U.K. to sell in the U.S. market?
The recession would still impact their cost of production but it would still let them be profitable as a business in America, at least more profitable than what they would be in England.
How would your answer above change? Elaborate.
Since the possible recession and the current economic situation of England is extremely poor all of my answers would be more positive of their current situation. As mentioned above, if their business were located in America instead their market of business would not be impacted to the same extent as it currently is. They would still be able to sell their product to people who are not impacted by the economic state of England. They would also sell their products in American dollar so when they transfer their profits back to England the amount of profit they would make would increase due to the current exchange rate.