An Introduction to International Economics

For U.S. companies with large trade and investment exposures to Western Europe, the year 2000 was a very difficult time. During that year, the euro fell in value from just under US$1.00 to approximately $0.80. U.S.-based firms such as Compaq, IBM, Intel, Polaroid, Microsoft, Baxter International, Heinz, Caterpillar, Dow Chemical, Dupont, and TRW all suffered as a result. Why? Their euro sales were worth less in dollar terms, and dollar terms mattered. One Wall Street analyst estimated that the fall of the euro in 2000 shaved 3 percent off total Standard and Poor 500 operating profits in the third quarter alone. The president of TRW lamented, “If I could report in euros, we would be having a bang-up year.” Unfortunately, this was not possible.

In 2003, the euro increased in value. This was good news for U.S.-based firms selling in the euro area, but bad news for EU-based firms selling in the United States and reporting profits in euros. Volkswagen, for example, attributed a €1 billion fall in profits to the strengthened euro. One way or another, changing exchange rates affect firms engaged in international production.