Question

(Related to the Chapter Opener on page 776) An article in the Wall Street Journal on changes in Intel's sales noted, "Intel sells its chips to customers in U.S. dollars, but many $\mathrm{PC}$ makers that buy those chips sell their products in local currencies." In these circumstances, would an increase in the value of the dollar relative to foreign currencies be likely to help or hurt Intel's sales? Briefly explain.

Short answer

In general, an increase in the value of the US dollar relative to foreign currencies would likely hurt Intel's sales as it would make Intel's chips more expensive for foreign PC makers. However, the actual impact would also depend on other factors such as the price elasticity of demand for Intel's chips and inflation rates in these foreign markets.

Step-by-step solution

Understanding the situation

Firstly, understand that when the value of the US dollar increases relative to other currencies, it means that the US dollar is strengthening. When this happens, US goods become more expensive for foreign buyers who must convert their local currency to dollars to make purchases.

Analyze the effect on Intel's sales

Given that Intel sells its chips in US dollars, an increase in the value of the US dollar means that these chips become more expensive for foreign PC makers who have to convert their local currency to dollars. Assuming all other factors remain the same, this could lead to a decrease in demand for Intel's chips in foreign markets as these chips become more expensive.

Consider other potential factors

Although the increase in the value of the US dollar may make Intel's chips more expensive in foreign markets, other factors could potentially offset this. For example, if the demand for Intel's chips in these markets is inelastic, meaning that buyers are not sensitive to price changes, then the increase in price may not significantly affect sales. Similarly, if there is inflation in these foreign markets, the real cost of Intel's chips may not increase despite the increase in the dollar value.

Key concepts

Exchange Rate Effects

When discussing international sales, understanding exchange rates is crucial. These rates determine how much of one currency can be exchanged for another. A stronger US dollar means that foreign buyers need to spend more of their local currency to purchase products priced in dollars.
For companies like Intel, who price their products in US dollars but sell globally, fluctuations in currency values can significantly impact revenue.

• A stronger dollar typically means US-based goods are more expensive in foreign markets.
• This can lead to a decrease in demand as foreign buyers look for more affordable options.
• Conversely, a weaker dollar makes US goods cheaper and potentially boosts sales abroad.

This effect of exchange rates is a fundamental part of international business strategy, influencing pricing, demand, and ultimately profitability.

Dollar Valuation

The valuation of the dollar is a measure of its value relative to other currencies. When the dollar's value increases, it's considered stronger, and when it decreases, it's weaker. Changes in dollar valuation can have varied impacts on multinational companies.
Regarding companies like Intel:

• A stronger dollar means their products become pricier for foreign customers because of currency conversion needs.
• This can make it harder to sell products abroad unless there is strong demand regardless of price.
• A weaker dollar, however, could benefit US exporters as it makes their products cheaper in international markets.

The challenge for businesses is to anticipate these changes and develop strategies to mitigate adverse effects while capitalizing on potential benefits.

Foreign Market Demand

Foreign market demand refers to how much interest there is for a product in markets outside its home country. Several factors influence this demand, including exchange rates, economic conditions, and local consumer preferences.
For companies like Intel, foreign market demand is crucial. High demand can offset the challenges of a strong dollar, especially if:

• There's limited competition, meaning alternatives are not easily available for customers.
• The products are technologically advanced and seen as necessities.
• There's an established brand loyalty which sometimes supersedes cost considerations.

Businesses often analyze foreign market demand to decide where to invest their marketing and sales efforts.

Price Elasticity

Price elasticity measures how sensitive the quantity demanded of a good is to a change in its price. It gives insights into how a price change affects sales volumes.

• If a product is price inelastic, demand does not change significantly with price increases.
• In contrast, if it is elastic, even small price changes can lead to substantial changes in demand.

For Intel and others, understanding price elasticity helps in setting prices that maximize revenue, especially in foreign markets where currency fluctuations make prices more volatile. If the demand for Intel’s chips is inelastic, a stronger dollar may not drastically affect its sales." This means even if their chips become more costly due to a strong dollar, sales might remain stable if buyers see them as vital purchases.

International Trade

International trade involves the exchange of goods and services across international borders. It's crucial for accessing larger markets, but it's also affected by currency fluctuations and trade policies. For tech companies like Intel, international trade is a significant part of operations.

• Exports contribute significantly to revenues but are subject to exchange rate risks.
• Tariffs and trade barriers in certain regions can further impact costs and profitability.
• Technological and brand competitiveness can help mitigate some trade challenges.

Strategically navigating international trade requires a deep understanding of global market conditions, currency dynamics, and geopolitical influences on trade agreements.