Apr 28 2008

Does the weak dollar help US manufacturers?

Yes, but it’s a bit more complicated than it might seem at first. This podcast looks at the impact of the falling dollar on the aerospace industry, in which manufacturing for the industry’s largest firms is sourced to hundreds of smaller companies each with factories in countless countries from North America to Europe to Asia.

The recent fluctuations in the US dollar exchange rate has wreaked havoc for firms located in the US and trying to compete in this competitive market. In some cases, the outcome has been positive, but as you’ll hear, not always.

Listen to this podcast then discuss the questions below:

Discussion Questions:

  1. How has the weaker dollar helped the Connecticut firm Kamatics?
  2. How has Kamatics been hurt by the weaker dollar?
  3. Why do fluctuations in the dollar make “business more unstable”?
  4. How does the impact of currency swings become more ambiguous “as the economies of the world become more intertwined”?
  5. Why did EchoAir stop manufacturing products in Romania? What impact would a revaluation of the Chinese Yuan have on EchoAir’s current manufacturing decisions?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

5 responses so far

5 Responses to “Does the weak dollar help US manufacturers?”

  1. Michael Dailyon 30 Apr 2008 at 12:24 am

    I'm surprised nobody has posted on this blog yet, but I'll claim it first:

    A weaker dollar has meant relatively cheaper products, which means a lot as the firm ships out around 1/3 of products. With deprecation the dollar, the value of exports is now cheaper and more attractable than competing European firms.

    In the long run fluctuations in currency makes business unstable. Also prices were generally set a long time ago, so currency swings have not helped. In addition plants in Europe have had increased labor costs from the increase in the value of the Euro relative to the dollar.

    Fluctuations in the dollar make business more unstable because the price of something is always changing. Therefore, one day you could get a great deal on something while on another day you might feel like you are getting scammed.

    Currency swings are becoming more ambiguous because they generally do not have a large impact on large companies that are spread out in many countries across the world. However, they do have an effect on small and large companies and they may significantly hurt or help them.

    Echo Air stopped manufacturing in Romania because what was originally cheap labor there had become too expensive. Largely because Romania switched to the Euro, it was difficult to for Echo Air to keep up with the rising labor costs. And now that the Yuan seems to be increasing in value Echo Air, may reconsider keeping China as its base of operations and move to a country that offers cheaper labor.

  2. Jason Welkeron 30 Apr 2008 at 12:35 am

    Thanks Michael! I figured the FIVE discussion questions scared people away! That was my bad! Good answers, though!

  3. Robin Thekemuriyilon 07 Dec 2008 at 7:36 am

    How has the weaker dollar helped the Connecticut firm Kamatics?

    Having a weak dollar definitely has advantages and disadvantages for America producers. A weak dollar will make imports more expensive. It is now more expensive for a US consumer or producer to import, because the weak dollar can now buy less of the other currency. Although this is a disadvantage for US consumers and producers, the domestic market has being able to benefit. Due to the high prices to import, the producers or consumer may buy the goods or services from United States itself. But the reason why the weak dollar has helped US manufactures is different. The weak dollar also makes exports less expensive. It is now cheaper for a foreign consumer or producer to buy exports from America because the other currency can now buy more of the weak dollar. The weak dollar can be considered as an advantage for US producers in the short run. The costs for American producers have now decreased as well as the price by 40% compared to the Euro. This, as the podcast states has giving US manufactures a price advantage. When in competition with European producers the lowered costs make American products more attractive. This is how the weaker dollar has helped US manufactures.

  4. Christinaon 17 Dec 2008 at 6:18 am

    In general, a weakening of a local currency in terms of other currencies would be good for local manufacturers as their products would appear cheaper to foreign industries.

    So in this case, the weakening dollar has helped the Connecticut firm Kamatics as their are exports cheaper and they therefore sell more products. In other words, the price of their goods have decreased while the costs of manufacturing have stayed the same.

    Then again, not all exporters benefit as aerospace is an international industry so the parts of the airplanes are made abroad. Therefore, the depreciating dollar has not lead to an advantage. Simultaneously, the contracts signed, as stated in the podcast, are long term contracts that are not affected by the present currency fluctuations. So there is no affect in the long term and only benefits and disadvantages to some in the short-term.

  5. Bjorn Kon 18 Apr 2010 at 9:23 pm

    The weaker dollar has helped the Connecticut firm get new contracts to build more aeronautical machinery. Instead of producing the machinery in Asia or elsewhere, the weaker dollar gives the firm a comparative advantage in producing the machinery. It is cheaper for the firm to produce the equipment than for a foreign company to produce it.