Hi, guys. Welcome back to Global Business Environment course two. This is module one part five. We continue to talk about exchange rates and foreign currency and their impact on the global business environment. We've been talking a little about history and described that today we live in a world were some economies are governed by foreign or fixed exchange rates, and others by floating or market-driven or more market-driven exchange rates. And it is a very complex topic and we could be talking about a lot more, in a lot more depth and a lot more things. So this is just an introduction, but what I want to emphasize to you today is that we live in a complex world. We have here a map of the world and I'm going to show you another version of this map where we see different markets using different forms of pegs or fixed exchange rates. We're going to see some countries that use the U.S. Dollar as their currency. They don't have a foreign currency. We're going to see some governments that have a fixed exchange rate, and they say it's $1 to their local currency. And so, let me go through this very very quickly. The dark blue here are countries that use the Euro. The dark green are countries that use the U.S. Dollar. There are some countries, these countries in light blue, peg or fix their local exchange rate to some value of the Euro. And again, they're trying to bring some stability to their local economy. Light green are countries that peg their exchange rates to the U.S. Dollar, again, is trying to prevent some of the fluctuations. And there are other countries in the world that use other, currencies, and have, fluctuations if they, if they have floating exchange rates, and others that have, these, fixed systems. I wanted to talk a little bit about how this impacts daily life. We've talked about supply and demand, and we've talked about this market, but if you live in an economy that has, these large fluctuations and major devaluations, it really has an impact on individuals and businesses, across time. One example I always like to use is the devaluation of the Mexican Peso, which occurred in 1994. And to put it roughly in 1994, the Mexican Peso which they actually call the new Mexican Peso because they they converted it from a denomination that required them to use thousands and millions of bills, so they converted to what they call the new Mexican Peso. It was probably about three Mexican Pesos to one U.S. Dollar. And I happened to be in Mexico in late 1994, when this, major devaluation occurred. And, basically, overnight, in a period of, one to two weeks, the Mexican Peso became so weakened that it really wreaked a lot of havoc on the entire society. The value of the, the Peso crashed and it became the case that ten pesos equaled one U.S. Dollar. So it went from three to ten almost overnight, in a period of two weeks. And what is the impact on, citizens or businesses? Well, think about that for a minute. If you lived in Mexico and you had, a business where you imported goods from the United States, what happened to your costs overnight? Did they go up or down? Your costs went way up. In fact, they, they tripled overnight. The impact is that imports into Mexico became very expensive, and if, if the economy is reliant on small businesses that import whatever products and services come from the United States, whether it's agriculture products or manufactured products et cetera, it it, crashed overnight. What happened to tourism? If you were in the tourism business, what happened to you overnight? Well, you probably saw an increase in tourists from places like the United States that use the U.S. Dollar because suddenly it became cheaper to buy products and services related to tourism. So if you were a U.S. customer you might come into the country expecting to pay, I don't know, 100 Pesos for a hotel room and for you that would have cost three Pesos to a Dollar. That would've cost $33 approximately. If you were there and happened to be able to take advantage of the exchange rate change, the devaluation overnight and the hotel didn't change its prices, which you would expect it to do over time, what would happen is that your dollar would go a lot further. If the hotel room kept its price of, let's say, 100 Pesos, instead of having to spend $33 to buy 100 Pesos, now at that value of ten Pesos to one Dollar you only need to spend ten Dollars to pay for that hotel room. And so tourism becomes a lot less expensive for people from the United States or others who use the Dollar. It gets more complex though because many individuals and businesses depend on loans and accounts in other places. They have retirement plans, and overnight those loans became much more expensive. Overnight the value of some of their investments decreased by a third. So this has a very real impact on the daily life of people. And one of the things I like to tell my students in the United States is living in the United States we don't notice the impact of these fluctuations over time as much as citizens do in other places. And that's because the United States Dollar plays an important role in the global financial systems still as, as one of the major world currencies. But people in other places are very aware of the value of the Dollar, their currency to the Dollar and the Euro to the Dollar or the Euro to their currency because they are very in tune with imports and exports and, and the investments and the mortgages, and things that they have which are so highly impacted by these exchange rates. So, this map shows attempts by governments to stabilize things, and it doesn't always work, by either, pegging their exchange rate to the Euro, or the Dollar or by using Dollars in some cases. Again it doesn't always work because there are internal internal economics at work in the country. To finish this up I want to show you a picture of reserves of foreign currencies around the world. And some countries for example China, have great very high levels of currency, hard currency in reserve. What that shows us is as we've been discussing all of these transactions that occur, if if there is a lot of demand for products made in China, for example we said that that's demand for the Chinese Yuan. What may happen though is that the government may intervene and keep in federal reserve tight banks, government government central banks may keep in reserve many of those U.S. Dollars. They may buy debt bonds in denominating U.S. Dollars and keep that currency in reserve. And so it has hard currency to use when these transactions are made, when when U.S. citizens, for example, or Brazilian citizens buy something made in China, they have enough currency on hand to make those exchanges and to continue to allow imports and exports to occur. In other places in the world, we don't see that all the time. We see some countries that have very low levels of currency in reserve, and that, has a great impact on their ability to import or export. For example, right now, countries like Argentina and Venezuela have very low levels of currency in reserve, and that makes it very difficult for those economies to engage in these transactions, these imports and exports because there aren't there isn't much demand for their currency. Perhaps there's concern that it won't maintain its value and since there's not much demand for it, there isn't much happening in terms of exports, and therefore it's very, very difficult for imports to occur. It's very difficult for citizens of countries with low reserves to buy products and services because it drives up the price, when there's low supply, on hand, it drives up the price of, of, selling your, your local currency, and buying that foreign currency, like the Dollar. And so, therefore, makes, buying foreign products very, expensive. In some places, you have to apply, with the government, to be able to buy and import from abroad. That obviously impacts the lives of consumers as it reduces choice, and impacts businesses as there are fewer options for for them to use to sell in their local markets. And so, the, the, the point I'm trying to make is that the day-to-day lives of regular people are impacted by this complex world of floating and fixed exchange rates. We'll see you back in part six. Thank you very much.
