Universal Circuits' Case Assignment
QUESTION #1
Does the Universal Circuits’ Irish controller have a convincing argument for the weakness of the dollar? Why or why not? How would you interpret the evidence? The controller of the Irish division does have a valid point when stating that the U.S. dollar is in a vulnerable position due to the fact that its trade deficit is currently in excess of $100 billion and growing. (see Exhibit 1). While Universal Circuits’ chief financial officer, Joe Merrill, is correct when stating that the dollar is in the middle of its twenty-year range, he never mentioned which countries currency he was comparing it to. When compared to the Irish punt, which the controller and the company have a vested interest in it is clear that over the last twenty years the dollar has been decreasing in value. When one analyzes the data given in Exhibit 1, it is quite clear that since 1960 when the Punt/Dollar ratio was 0.36 it has since gone to 0.42 in 1970, to 0.53 in 1980 and finally 1.01 in present day (1984). This data plainly shows that the value of the dollar has been steadily going down relative to that of the Punt. Another part of Exhibit 1 that indicates that the increasing trade deficit is weakening the dollar, primarily when comparing it to the Irish Punt, is the Relative Industrial Prices section. This section of the exhibit shows how, once again, over the course of the 20 years in the study the price for industrial activities has gone up in Ireland relative to U.S.A. According to relative price theory the cost of a certain good should be equivalent in all currencies. In relative purchasing power parity, the exchange rate between the home and foreign currency should adjust to indicate changes in the price levels of the two countries. In this specific scenario if the theory were to hold true for the ratio to be behaving the way the value of the currency must be acting in an appropriate manner. Therefore as the dollar depreciates and the relative costs incurred to the
Does the Universal Circuits’ Irish controller have a convincing argument for the weakness of the dollar? Why or why not? How would you interpret the evidence? The controller of the Irish division does have a valid point when stating that the U.S. dollar is in a vulnerable position due to the fact that its trade deficit is currently in excess of $100 billion and growing. (see Exhibit 1). While Universal Circuits’ chief financial officer, Joe Merrill, is correct when stating that the dollar is in the middle of its twenty-year range, he never mentioned which countries currency he was comparing it to. When compared to the Irish punt, which the controller and the company have a vested interest in it is clear that over the last twenty years the dollar has been decreasing in value. When one analyzes the data given in Exhibit 1, it is quite clear that since 1960 when the Punt/Dollar ratio was 0.36 it has since gone to 0.42 in 1970, to 0.53 in 1980 and finally 1.01 in present day (1984). This data plainly shows that the value of the dollar has been steadily going down relative to that of the Punt. Another part of Exhibit 1 that indicates that the increasing trade deficit is weakening the dollar, primarily when comparing it to the Irish Punt, is the Relative Industrial Prices section. This section of the exhibit shows how, once again, over the course of the 20 years in the study the price for industrial activities has gone up in Ireland relative to U.S.A. According to relative price theory the cost of a certain good should be equivalent in all currencies. In relative purchasing power parity, the exchange rate between the home and foreign currency should adjust to indicate changes in the price levels of the two countries. In this specific scenario if the theory were to hold true for the ratio to be behaving the way the value of the currency must be acting in an appropriate manner. Therefore as the dollar depreciates and the relative costs incurred to the