Friday, October 05, 2007

The Dollar and the Drug Trade

The value of the U.S. dollar (USD) is falling against a number of foreign currencies, including the Canadian dollar (CAD), also known as the loonie. As the dollar weakens against the loonie, imports from Canada, including illegal drugs like marijuana, become more expensive. As American dope-smokers get priced out of the market for high-quality Canadian marijuana, they increasingly turn to lower-quality Mexican varieties and, as this Reuters article points out, Mexican growers become more willing to assume the risks of planting on American soil.

To see how the weakening dollar leads to change in the drug trade, consider the change in the CAD–USD exchange rate over the past year:

October 2006: 1.12 CAD per USD
October 2007: 1 CAD per USD

The value of the USD in October 2007 (1 CAD) is lower than it was in October 2006 (1.12 CAD). The exchange rate between the Mexican peso (MXN) and the U.S. dollar has changed a bit over the past year, but for simplicity, we'll assume it remained constant at 11 MXN per USD. Now that we've got some exchange rates, let's take a look at marijuana prices.

Let's assume that the prices of Canadian and Mexican marijuana remained roughly constant from October 2006 to October 2007. Suppose that 1 pound of top-quality Canadian marijuana sells for 3,500 CAD, while 1 pound of not-so-top-quality Mexican marijuana sells for 19,250 MXN. In October 2006, the price Americans paid for top-quality Canadian marijuana was:

3,500 CAD per pound x (1 USD / 1.12 CAD) = 3,125 USD per pound

Over the past year, the value of the USD declined against the CAD. The two currencies reached parity in September of 2007. As a result, the price Americans paid for Canadian marijuana increased to 3,500 USD by October of 2007 [3,500 CAD x (1 USD / 1 CAD) = 3,500 USD]. Given the roughly constant exchange rate between the peso and the U.S. dollar, the price Americans pay for lower-quality Mexican marijuana would remain the same:

19,250 MXN per pound x (1 USD / 11 MXN) = 1,750 USD per pound

The relative price of a good is the number of other goods that you can purchase for the same amount of money. Consider how the change in the exchange rate affects the relative price of top-quality Canadian marijuana. In October 2006, Americans could purchase approximately 1.8 pounds of lower-quality Mexican marijuana for the same price as 1 pound of higher-quality Canadian marijuana (3,125 USD per pound / 1,750 USD per pound). By October 2007, Americans could purchase 2 pounds of Mexican pot for the price of 1 pound of Canadian pot. As the value of the U.S. dollar declines against the loonie, the relative price of Canadian marijuana increases and the Mexican alternative becomes increasingly attractive.

Discussion Questions

1. What factors explain the decrease in the value of the U.S. dollar against the Canadian dollar? Why do you think the value of the dollar is not declining as quickly against the Mexican peso?

2. How does the oil boom in Western Canada impact the marijuana industry in British Columbia?

3. The Reuters article mentions the expansion of marijuana cultivation inside the U.S. by Mexican criminal groups. How does the rising price of Canadian pot contribute to the expansion of marijuana cultivation within the U.S.?

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