Question

petroleum is sold in a world market and tends to be priced in US dollars. Japanese firms import petroleum to use in manufacturing, such as plastics and other products. How are their profits affected when the yen depreciates against the dollar? explain

Answer 1

Petroleum is sold in world market and it is priced in US dollars, so if a petroleum importing nation's currency depreciate against US dollar then this will affect the profit of the firms operating in that country because these firms use petroleum as a factor of production. The exchange rate of japan in terms of dollar increases, that's why yen depreciates. Now, for importing same quantity of petroleum they have to pay higher amount which results in higher cost of production. Therefore, firms have to charge higher prices for the final goods which results in decrease in the demand for their product. Hence, this will affect the profit of the firms.