Part 2---Mini Lesson on the US Dollar vs The Euro.

Yesterday I wrote a mini-lesson on the relationship between the US Dollar and the Euro:

One year ago (April 9th, 2014) the US dollar price per Euro was $1.40.  Read that as it took $1.40 to "buy" 1 Euro dollar. If I wanted to buy something that was priced in Euros, say 100 Euros, I would have had to exchange $140.00US dollars in order to buy it.

Today (April 9th, 2015) the US dollar price per Euro is $1.08. Read that as it takes $1.08 to "buy" 1 Euro--rounded up a bit). If I wanted to buy that same item today and it was still priced at 100 Euros, I would have to exchange $108.00US dollars to make that purchase.

When I exchange my US Dollars to get 100 Euros I give up FEWER US Dollars today than I did one year ago to do so---$32.00 to be exact. The purchasing power of a US Dollar relative to the Euro has INCREASED by 23% ($32.00 divided by $140.00 X 100) in 365 days.

In Macroeconomic terms, we can say the US Dollar has APPRECIATED by 23%.

Today I want to look at the same problem but from the standpoint of the Euro.

Currency valuations are simply reciprocals of each other. If you know one, you know the other---with a little math.

The above example read "the US dollar price per Euro was $1.40" one year ago.  Expressed as a ratio this would be $1.40/1.00Euro.

If we take the reciprocal of $1.40/1.00Euro we will have 1.00Euro/$1.40.  Divide that out and we get "The Euro price of per US Dollar was .71 Euro cents" one year ago.

In other words, last year the holders of Euros had to give up .71 Euro cents in order to "buy" $1.00.

In sum:  Holders of dollars had to give up $1.40 to buy 1.00 Euro and conversely the holders of Euros had to give up .71 Euro cents to buy a $1.00.

So, if last year if the holders of Euros wanted to buy something priced at $100.00US they would have had to exchange 71.00 Euros in order to do so (.71 Euro cents X 100).

Move ahead one year.

Yesterday, the US dollar price per Euro was $1.08.  If we take the reciprocal of that (1.00 Euro/$1.08) we get the "Euro price per US Dollar was .93 Euro cents.

So, yesterday the holders of Euros would have had to exchange 93 Euros in order to "buy" $100.00. Last year it was 71 Euros.  That is a difference of 22 Euros, or in percentage terms, a 31% decrease in value of the Euro relative to the US Dollar (22Euros/71Euros X 100).

In Macroeconomic terms, we can say the Euro has DEPRECIATED by 31%.

Notice while the currencies are reciprocals of each other the percentage changes are not (23% versus 31%). This is because...math.  The base numbers are different. One starts at a high base and goes lower and the other a lower base and goes higher.  No conspiracy there.

Hopefully you can see from this example that exchange rates matter.

The physical/non-physical properties of the goods or services bought in either the US or Europe are the same (ceterus paribus).  The only thing that changes the relative prices of the goods/services is the value of the currencies used to purchase them.

Mini lesson--US Dollar vs the Euro.

One year ago (April 9th, 2014) the US dollar price per Euro was $1.40.  Read that as it took $1.40 to "buy" 1 Euro dollar. If I wanted to buy something that was priced in Euros, say 100 Euros, I would have had to exchange $140.00US dollars in order to buy it.

Today (April 9th, 2015) the US dollar price per Euro is $1.08. Read that as it takes $1.08 to "buy" 1 Euro--rounded up a bit). If I wanted to buy that same item today and it was still priced at 100 Euros, I would have to exchange $108.00US dollars to make that purchase.

When I exchange my US Dollars to get 100 Euros I give up FEWER US Dollars today than I did one year ago to do so---$32.00 to be exact. The purchasing power of a US Dollar relative to the Euro has INCREASED by 23% ($32.00 divided by $140.00 X 100) in 365 days.

In Macroeconomic terms, we can say the US Dollar has APPRECIATED by 23%.

Assuming businesses in the EuroZone did not change their prices over the course of the year, Europe is "On Sale" by 23% today for the holders of US Dollars.

Here is the strange part.  If Americans take advantage of this "sale" and go to Europe on vacation, this affects the IMPORTS of goods and/or services to the US from the EuroZone.  This is a bit counter-intuitive because we usually think of imports as foreign stuff that is already in the US that we purchase (think Walmart, for example).

Consuming a European good or service, whether here or "there", is considered an import.

Here is your homework.  Consider the above example from the perspective of a holder of Euros, using the same exchange rates. Re-write the explanation from that perspective.

Hope this helps you understand a bit more the complex concept that is exchange rates.

Low oil prices adversely affect recycling efforts. How does that happen?

Plastic bottles that hold our favorite soft drink or choice of bottled water contain an input called Polyethylene Terephthalate, or "PET".

One of the inputs used to make PET is crude oil.  However, once PET is created it can be reclaimed through the recycling of plastic bottles and used over and over and over again...

Producers of plastic bottles have a choice between using newly produced "virgin" PET or recycled PET made from plastics recovered from re-cycling programs across the US.

When crude oil prices are high, virgin PET is more expensive to produce and recycled PET has a competitive price advantage.

The recent plunge in crude oil prices has eliminated that advantage, and then some:

Recycling Becomes a Tougher Sell as Oil Prices Drop The fall in oil prices has dragged down the price of virgin plastic, erasing recyclers’ advantage

"...At the start of this year, new polyethylene terephthalate, a type of plastic widely known as PET and used to make soft-drink and water bottles, cost 83 cents a pound, according to data compiled by industry publication Plastics News. That was 15% higher than the cost of recycled PET. 

As of late March, the cost of new PET had fallen to 67 cents a pound, or 7% less than the recycled form, which costs 72 cents a pound...."---(Wall Street Journal)

Here is a graphic from the article that illustrates the change in price over time.  When the BLUE line is above the RED line, it is more cost effective to use recycled PET.

This turn of events in the crude oil markets has had a negative affect on the recycling industry.

"...Prices are “very important to stimulate good recycling rates among our communities,” saysCarey Hamilton, executive director of the Indiana Recycling Coalition.
Especially hurt are the middlemen of the recycling supply chain, who buy used bottles, cans, paper and other items and then use machinery to sort, bale and sell the recyclables. Prices middlemen get when reselling some types of plastic have plummeted by as much as half in just a few months, says Allan Zozzaro, a partner at Zozzaro Atlantic Coast Processing LLC in Passaic, N.J. “It’s putting a real strain on all recycling companies,” he says..."---WSJ

This example is a nice one to use in class to illustrate the microeconomic concepts of Substitute Goods in production, "Substitution Effect" vs "Substitutes", the difference between Quantity Demanded (or Quautity Supplied) and Demand (or Supply), and the power that prices hold over the allocation of societal resources.