How is it possible for profits of a company to change 35 % if the currency value
ID: 1108398 • Letter: H
Question
How is it possible for profits of a company to change 35 % if the currency value changed by only 9.2%? Newspaper reported that Toyota’s profit for the coming fiscal year are expected to drop from Yen 2.31 trillion to Yen 1.5 trillion, following the Yen’s strengthening from Yen 120 per dollar to Yen 109 per dollar. How is it possible for profits to decline 35% if the Yen appreciated by only 9.2 %? Describe some possible scenarios why this could happen? The number of vehicles sold is expected to remain the same.
Explanation / Answer
Consider the given problem, here it’s given that as the “Yen” get stronger relative to “$” by “9.2%”, => leads to decrease in the profit of “Toyota” by “35%”.
So, here as the home currency get stronger, => the “exchange rate”, => decreases, => the price of “Toyota” in the foreign country increase, so as the price increases => the “Toyota” get expensive, => the sale will decreases.
Now, as we know that the demand for “durable” goods is relatively elastic, => as the price increase, quantity will fall and the percentage reduction in the quantity is more than the percentage increase in the, => the “Revenue” will decrease.
Now, as we know that “producer” also have to import many input from foreign country, because all inputs are not available in the home country. So, as the home currency get stronger => the import cost in the home country decreases, => the “marginal cost” will fall, but here the reduction in the “TR” is much stronger then the reduction in the cost => the profit will fall down.
So, here as the home currency appreciate, => leads to fall in in “Profit”.