Exchange Rates and Prices

The Case of United States Imports

William R. Smith

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9781138726819
• eBook ISBN: 9781351751315
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Originally published in 1996. This study looks at the impact of exchange rate fluctuation on the pricing practices of foreign industries that import into the United States market. It presents several studies of the pass-through behaviour of over 100 disaggregated commodity groups with bi-lateral exchange rates. The book presents analysis of specific competitors and their individual pricing responses to exchange rate changes, adding significantly to pricing theory as well as being useful for marketers in predicting business responses.

Contents

1. LIST OF TABLES
2. LIST OF FIGURES
3. LIST OF ABBREVIATIONS
4. CHAPTER I INTRODUCTION
5. Neo-Classical Theory and the Price-Exchange Rate Link
6. From Theory to Practice
7. Public Policy Ramifications
8. Pass-Through and Empirical Research
9. Recent Theoretical Developments
10. The Basic Purpose of the Present Study
11. Research Questions
12. CHAPTER II LITERATURE REVIEW
13. Currency Regimes
14. Theoretical Foundations: Purchasing Power Parity
15. A Conceptual View of Incomplete Pass-Through
16. Empirical Research
17. Summary
18. CHAPTER III RESEARCH ISSUES AND QUESTIONS
19. Effects Of Exploratory Nature of The Research
20. Policy and Theory Issues at The Macro-Level
21. Policy Issues at The Firm Level
22. Pass-Through, Ptm, and The Need for Further Research
23. Key Research Questions
24. CHAPTER IV RESEARCH METHOD: SAMPLE DESIGN
25. Time Frame of The Sample
26. Data on Import Prices
27. Desirable Features of The Sample of Import Prices
28. Criteria for Import Price Sample Selection
29. Data on Bi-Lateral Exchange Rates
30. Countries Included in the Sample
31. Scope Of Final Sample
32. CHAPTER V RESEARCH METHOD: PASS-THROUGH ESTIMATION
33. The Basic Model
34. Expression of The Relationship in Multiplicative Form
35. The Model to be Estimated
36. Other Assumptions of the Model
37. Exclusion of Other Possible Explanatory Variables
38. CHAPTER VI RESEARCH METHOD: RESEARCH DESIGN
39. Sub-Periods of Appreciation and Depreciation
40. Other Measures of Pass-Through
41. CHAPTER VII DATA ANALYSIS AND RESULTS
42. Preliminary Analysis Tools
43. Regression-Based Pass-Through Measruement Model
44. Results
45. Other Possible Limitations of the Measurement Process
46. Supplemental Analyses
47. The Analysis of Selected Additional Products
48. The Special ‘‘Case” of Dutch Beer
49. CHAPTER VIII CONCLUSIONS
50. Interpretation of Measurement Model Results
51. Interpretation of End-Point Measurement Results
52. Implications for Theory Development
53. Managerial Implications of the Findings
54. Directions for Future Research
55. Summary of the study
56. Concluding Comments
57. APPENDIX A: TSUSA CATEGORIES EXCEEDING $75 MILLION IN IMPORTS – 1988
58. APPENDIX B: LISTING OF PRODUCT CATEGORIES STUDIED
59. APPENDIX C: LISTING OF PRODUCTS BY PRODUCT TYPE
60. APPENDIX D: PASS-THROUGH: SECOND-DEGREE PDL MODEL
61. APPENDIX E: END-POINT PASS-THROUGH: PRODUCT BY COUNTRY
62. REFERENCES
63. INDEX

List of Tables

Table 1.1: Largest Monthly % Increases and Decreases in the U.S. Dollar Value of the Currencies of Selected Countries for the Period 1978-1988

Table 2.1: Ratio of U.S. Import Price Change to Percentage Revaluation in Dollar Terms, by Elasticities of Demand and Supply

Table 2.2: Summary of Import Pass-Through Rates for Studies Reviewed

Table 4.1: U.S. Trade Data - 1988 Imports for Consumption: Customs Value

Table 4.2: Description of One-digit TSUSA Categories

Table 4.3: The Path Leading to the 112 Product Categories Included in the Final Sample

Table 4.4: Countries Included in the Sample

Table 4.5: Highlights of 1988 U.S. Import Data and of the Final Sample Data

Table 4.6: Some Characteristics of the Final Sample

Table 4.7: Fifteen Product Categories from Sample with Greatest Dollar Volume of Imports in 1988 in Millions of Dollars

Table 4.8: Fifteen Product Categories from Sample with Largest Percentage Increases in Total Value of Imports: 1979-1988

Table 4.9: Breakdown of Sample by Product Type (Value in Millions of U.S. Dollars)

Table 4.10: Breakdown of Sample by Country

Table 4.11: Breakdown of Sample by Region

Table 6.1: Sub-Periods of Major Movements in Foreign Exchange Rates: 1979 – 1988

Table 7.1: Results of Univariate Analysis of Selected Standarized Exchange Rate Time Series

Table 7.2: Product/Country Combinations Demonstrating SignificantPositive Levels of Pass-Through

Table 8.1: Proportion of Products By Country Demonstrating Pass-Through Under the End-Point Measurement Method

Table 8.2: Proportion of Products Demonstrating End-Point Pass-Through for Periods of Foreign Currency Appreciation

List of Figures

Figure 1.1: Selected Monthly Exchange Rates: 1978-1988

Figure 7.1: Japanese Bolts and Nut Prices and the Yen/Dollar Exchange Rate: 1978-1988

Figure 7.2: Mexican Electric Motor Prices and the Peso/Dollar Exchange Rate: 1983-1988

Figure 7.3: Dutch Beer Prices and the Guilder/ U.S. Dollar Exchange Rate: 1978-1988

List of Abbreviations

ISIC	International Standard Industrial Classification
nes	not elsewhere specified
nspf	not specifically provided for
PPP	Purchasing Power Parity
PTM	Pricing to Market
SIC	Standard Industrial Classification
SITC	Standard International Trade Classification
TSUSA	Tariff Schedule of the United States Annotated
U.S.	United States
USITC	United States International Trade Commission

I

Introduction

The pricing practices of foreign producers that import into the U.S. market receive great attention from many observers of international business. The advent of floating exchange rates in the early 1970’s for many advanced economies made the pricing of internationally traded goods a more complex proposition than had been the case under the Bretton-Woods regime of relatively fixed exchange rates. Businesspeople around the globe were forced to add the element of adjustments to exchange rate fluctuations to the myriad of other factors to be considered when establishing the prices of their products that would be sold in international commerce.

NEO-CLASSICAL THEORY AND THE PRICE-EXCHANGE RATE LINK

One theory as to how prices of internationally traded goods are related to exchange rates is termed purchasing power parity (henceforth PPP). PPP is grounded in the neo-classical model of perfectly competitive markets and is important because of the pervasiveness of the impact of this strain of economic theory on the thinking of many people in the industrialized world. People influenced by this tradition include leaders from business, academia, government, and labor. The press is also influenced by this theory base that is so ingrained in western economic thought. The following quote from a magazine of the popular business press serves as evidence:

Japanese car makers . .. have raised their prices only about

29% since 1985, while the yen has climbed 115% .. .

[Money, March 1988, page 86]

The Various Versions of PPP ¹

PPP at its most basic is referred to as the “law of one price.” The underlying tenet is that identical products will cost the same in a given currency (other than relatively minimal differences for transportation costs and any relevant duties) regardless of the country in which they are being sold.

The implication of this strict version of PPP is that changes in exchange rates will be matched by proportional changes in the prices of traded goods (some possible exceptions will be mentioned below). In the above quotation concerning Japanese autos, the law of one price would imply that as the yen appreciated 115 percent against the U.S. dollar, the dollar prices of Japanese autos sold in the U.S. would also appreciate 115 percent. The failure of a proportional adjustment of import prices to such an exchange rate fluctuation to occur has often led to charges of unfair trading practices against some firms and even entire countries.

The absolute version of PPP is similar to the law of one price, but it uses price levels rather than prices of particular goods. Each good in a country’s economy is weighted according to its importance in the economy. The resulting weighted price levels of each country are then equalized by an appropriate exchange rate. This exchange rate would take into consideration the respective inflation rates of the two countries in this process of equilibrating prices across the countries. If the law of one price holds for each good in an economy, then absolute PPP holds if the weights of each good in the two economies are the same, that is if each good is of equal relative importance to the economy in each country.

The most frequently used version of PPP is the relative version. This is more a matter of convenience than substance. Since most countries publish price indexes rather than prices of each individual good sold, relative PPP, with its calculation of a “theoretical” exchange rate based on changes in price indexes, is much easier to calculate than absolute PPP or the law of one price.

Is PPP the Answer?

T...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Dedication
• Table of Contents