Why does a falling dollar boost Pepsi? by mattsteinglass
November 10, 2009, 5:07 am
Filed under: Economics

More things I don’t understand about the world economy, courtesy of the New York Times. (You could fill a book with them. And people have! Lots!):

While the faltering dollar will make everything from French wine to Korean televisions more expensive for American consumers, it will also make American exports more competitive overseas — a lift for multinational corporations like Caterpillar, Intel and Pepsi.

Intel chips are made in Israel, Ireland and Vietnam. Pepsi is bottled wherever it’s drunk. Why is a falling dollar a boost for companies like that?

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Because as long as the “exporter” is U.S. based, some of the price of the chip/tractor/over-sweetened refreshment has to be repatriated to pay for the research, development, administration and mismanagement the occur stateside. Lobbying against health reform, for example, must be paid for by the can regardless of where the “water” was drawn and disguised and mislabeled.

So the falling dollar makes a can of pepsi cheaper overseas by loweingr the cost of the bottled hijinks. You’re welcome.

Comment by citifieddoug

Yeah, but is that really a significant portion of the cost of the item? Pepsi makes a lot of money because of huge volumes, but how much of every bottle gets repatriated in dollars to pay off the geniuses who invented that special cola formula, and would that really drop the cost and allow them to sell significantly more Pepsi?

Oh, wait, I think I may be thinking about this backwards. Maybe it doesn’t matter so much whether the overall price of the item is affected by the fall in the dollar; the point is that the portion of the item’s price that represents “profit” in the foreign currency now converts to that many more dollars when it’s repatriated. So it may not make Intel’s chips much more competitive against Chinese chips or whatever, and Intel may not sell any more chips, but on the same sales it was making before, Intel’s profits will rise in dollar terms proportional to the shift in currency. So it’s a boost for the company in terms of profit, but not so much in terms of sales, market share, number of workers, etc.

Assuming the company is making a profit, that is. Presumably if it’s losing money abroad, that becomes a bigger dollar loss.

Comment by Matt Steinglass

E.g. this is a little out of date but I see here that Coke’s profit per 8-oz serving was just under 1 cent in 1999:

So the money that’s getting repatriated to the US is clearly not going to affect price much, if at all, and thus is not going to increase competitiveness or volume. But the amount of pure profit will rise as 1 baht buys you more dollars. But one thing this illustrates is that to the extent that American companies’ manufacturing now happens abroad, a falling dollar may help the company and shareholders, but it doesn’t help American workers.

Comment by Matt Steinglass

I think that depends on what constitutes help and what constitutes workers.

I’m reminded of a professor’s lesson on the little packets of sugar you find on the table at a diner where the big jar used to be. The point made was that not having to refill the sugar jar at each diner is a very small improvement but across all the diners in the country, the packets are worth hundreds of million of dollars in productivity. The aggregated global economy may be much more sensitive to small price changes than any one of us might be, and a penny per 12-ounce serving probably makes a big difference to coke, and a big difference to many employees of coca-cola. (and a huge difference to Emory University’s financial wherewithal to tell new generations about sugar pakets.)

In the end, I think this: The weaker dollar is going to eat into people’s paychecks and might make it harder to buy all the things we’ve grown used to. It’s also going to put some significant number of people in this country back to work, and probably raise nominal wages.

But be careful not to cross populisms. If you are concerned that Americans generally have been living beyond their means and consuming a disproportionate share of the world’s resources, then it’s a little unfair to also deplore the flagging opportunity to continue.

Comment by citifieddoug

(alternatively, the syrup)

Comment by citifieddoug

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