Question

In at least 200+ respond to the following (please include any references used) Until we end of with one worldwide currency, and we may never have that happen (but if we do, I think we should call it a Global), companies that sell goods in multiple countries (and that list is getting longer by the day with online shopping) have to understand that the strength of their domestic currency will continually fluctuate against the currency of the buyers' country resulting in the inflation and deflation of their domestic currency. Explain the effects of either currency inflation or currency deflation (not both) on the domestic firm?

Answer 1

Hi,

The inflationary consequences are wide-, not just for individuals but also for companies and even nations. Consumers and companies alike must address the effects of both good and poor inflation.

Domestic firm/ business effected by currency inflation here are some points :

1. Price Change

If the price of service and product fluctuates, companies must spend money on printing new menus or adjusting price tags to list the appropriate prices. Hyperinflation could make matters worse. The cost of changing price tags, as the rate of inflation is widespread unpredictable (continuously rising), makes forecasting costs and profit margins much more difficult and thus larger expansion projects are put on hold simply because of the volatility that slows the economy and ultimately stifles it all together.

2. Borrowings

Banks are rapidly increasing their loan portfolio early in the inflation cycle, as the government's easy money policies move the economy into overdrive. Most companies are succumbing to the appeal of easy money during this economic "boom" and think having a business loan is a good idea. They figure the cost (in purchasing power) of paying back the loan because inflation rates are rising.

3. Consumer Purchase

There are ways in which businesses should prepare for inflation to reduce the risk of losing revenue. Gradually rising prices will avoid a drastic price hike because if your rivals don't react equally, they will have to dramatically increase their own prices, which will cause their customers to be "sticker shocked" and look for more affordable alternatives. Another way is sneakier than business.

4.Inventory cost

Rapidly rising costs influence not just the price customers pay, but also the amount corporations have to pay for the products and inventory. When new inventory costs more than the inventory you've just sold, this may lead to shortages of inventory.

5.Investment

High inflation stymies large investments. As inflation increases significantly above the federal target, consumer confidence in the economy is undermined. This triggers high loan interest rates as investors are seeking a return on their investments. It is because they want the increased risk of lending capital to compensate. It limits the company growth in the long term and prevents companies from taking over.