Foreign Exchange

Foreign Exchange There are price differences between the U.S. And UK sites for Toys 'r' Us. One example is the animated Talking Ben stuffed bear, which sells for $9.99 in the U.S. And £21.99 in the UK. The equivalent U.S. price in the UK should be £6.56, so there is a substantial price difference on this product. Consumers do not, however, have the right to demand equal prices. Each nation represents its own market, so the economic conditions for each nation will be distinct.

There are significant differences in the costs that underlie each product on retail shelves that are reflected in the retail price. Thus, the conditions for each market are different and the result will be different prices. Goods can flow across borders, but that does not imply that there is a global market -- each local market has its own conditions. Furthermore, retail prices for consumer goods do not direct the supply and demand conditions of each market.

The competitive situation of each market, and the relative buying power of each market are also factors. There are also taxes, costs of doing business and other national factors that are worth considering. Further, prices are influenced by the price elasticity of demand in each market. Beyond that, firms often price in relation to competition within the market and where the product fits with that competition, rather than pricing strictly based on demand conditions.

When an industry has a high degree of competition and price sensitive customers, prices will be lower. When there is little competition and low price sensitivity, prices can be significantly higher. Thus, in the U.S. The company might have to price a product with a low markup in order to be competitive with Wal-Mart or Amazon, so it does.

If in the UK competitive pressures do not drive down the price of the product, markups can be quite a bit higher, and that is probably what has happened with products like the Talking Ben that are substantially more expensive in the UK than in the U.S. 2. A currency crisis is the result of a sudden devaluation of a currency. Normally, this is brought about by market concern over the country's economic condition, in particular the balance of payments.

The IMF prescribes tight monetary policy and fiscal policy in response to a currency crisis. Normally a currency crisis occurs with a currency that has some pricing controls, rather than one that is free-floating and would otherwise be subject to more gradual market movements. Ideally, a currency crisis would be addressed by dealing with the underlying causes.

Tight fiscal policy -- reduced government spending -- is a logical response because currency crises typically reflect investor beliefs that the country will be unable to meet its spending obligations as a result of insufficient hard assets. Therefore, reduced spending can help to delay the need for additional capital. The result is not enough on its own to alleviate a currency crisis, but is part of the solution. Tight monetary policy typically reflects higher interest rates, which will drive down the value of the currency.

In a free-floating currency, the crisis will have already driven down the value of the currency. With a currency subject to controls, tight monetary policy is required to help devalue the currency, which should be another pillar in the defense against.