Global Competition and Exchange Rate Exposure

1985| Working Paper No. 837

In recent years international trade and international factors such as foreign currency exchange rates have grown in importance in firm-level decisions. The purpose of this paper is to analyze the primary economic factors which determine the way in which prices, production and cash flows adjust when exchange rates change. In addition, the impact on the cash flow adjustment to exchange rate changes of some strategic responses to increased global competition are considered. For example, it is shown that firms involved in monopolistic competition which (in an attempt to become more competitive) lower their marginal costs will reduce the sensitivity of their output prices to exchange rate changes, but increase the sensitivity of their total profits to exchange rates.