Prepared by Angela Chow Centennial College

1. Productivity, Unit Costs and Exchange Rates Chapter5 Appendix Prepared by Angela Chow Centennial College

2. Productivity, Unit Costs and Exchange Rates • When comparing unit labour costs across nations, the exchange rate can play an important role. • Exchange rate is the price of another nation’s currency.

3. Productivity, Unit Costs and Exchange Rates • The appreciation and depreciation of a country’s exchange rate can have a considerable impact on unit labour costs.

4. Productivity, Unit Costs and Exchange Rates • For example, when comparing the unit labour costs between Canada and Mexico, the Mexican wage rate is converted from peso to Canadian dollars.

5. $1 27 pesos $3 Mexican wage x = = 9 pesos 1 hour 1 hour If the Mexican peso depreciated, ceteris paribus, to 1 Cdn $ = 12 pesos, $1 27 pesos $2.25 Mexican wage x = = 12 pesos 1 hour 1 hour Productivity, Unit Costs and Exchange Rate If the Mexican wage rate is 27 pesos/hour Initial exchange rate: 1 Cdn $ = 9 pesos, Depreciation of pesos reduces Mexico’s unit labour cost (assuming MPP is the same).

6. Productivity, Unit Costs and Exchange Rates In the 1990s, increases in Cdn unit labour costs were offset by the depreciation of the Cdn $ and therefore decreased after conversion to U.S. Over the 2000-2005 period, Canadian unit labour costs were exacerbated by the appreciation of the Cdn $.

7. Productivity, Unit Costs and Exchange Rates • Therefore, we have three distinct concerns when looking at international comparisons of unit labour costs: • Wage rates • Productivity • Exchange rates

8. Productivity, Unit Costs and Exchange Rates End of Chapter 5 Appendix