Identifying Factors That Will Affect the Foreign Demand at the Sports  Exports Company

 

Recall from Chapter 1 that Jim Logan planned to pur- sue his dream of establishing his own business (called the Sports Exports Company) of exporting footballs to one or more foreign markets. Jim has decided to initially pursue the market in the United Kingdom because British citizens appear to have some interest in football as a possible hobby, and no other firm has capitalized on this idea in the United Kingdom. (The sporting goods shops in the United Kingdom do not sell footballs but might be willing to sell them.) Jim has contacted one sporting goods distributor that has agreed to purchase footballs on a monthly basis and

distribute (sell) them to sporting goods stores through- out the United Kingdom. The distributor’s demand

 

for footballs is ultimately influenced by the demand for footballs by British citizens who shop in British sport- ing goods stores. The Sports Exports Company will receive British pounds when it sells the footballs to

the distributor and will then convert the pounds into dollars. Jim recognizes that products (such as the footballs his firm will produce) exported from U.S. firms to foreign countries can be affected by various factors.

Identify the factors that affect the current account balance between the United States and the United

Kingdom. Explain how each factor may possibly affect the British demand for the footballs that are produced by the Sports Exports Company.

 

The website address of the Bureau of Economic Analy- sis  is  http://www.bea.gov.

1.   Use this website to assess recent trends in export- ing and importing by U.S. firms. How has the balance of trade changed over the last 12 months?

2.  Offer possible reasons for this change in the bal- ance of trade.

3.  Go    to    http://www.census.gov/foreign-trade/ balance/ and obtain monthly balance-of-trade data for the last 24 months between the United States and the United Kingdom or a country specified

by your professor. Create an electronic spreadsheet in which the first column is the month of con- cern, and the second column is the trade balance. (See Appendix C for help with conducting analy- ses with Excel.) Use a compute statement to derive the percentage change in the trade balance in the third column. Then go to http://www.oanda.com/ convert/fxhistory. Obtain the direct exchange rate (dollars per currency unit) of the British pound (or the local currency of the foreign country you se- lect). Obtain the direct exchange rate of the cur- rency at the beginning of each month and insert the data in column 4. Use a compute statement to derive the percentage change in the currency value from one month to the next in column 5. Then apply regression analysis in which the percentage change in the trade balance is the dependent vari- able and the percentage change in the exchange rate is the independent variable. Is there a signifi- cant relationship between the two variables? Is the direction of the relationship as expected? If you think that the exchange rate movements affect the trade balance with a lag (because the transactions of importers and exporters may be booked a few months in advance), you can reconfigure your data to assess that relationship (match each monthly per- centage change in the balance of trade with the ex- change rate movement that occurred a few months earlier).