Exchange Rates aqa

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Exam code:8132

The impact of exchange rates

An exchange rate is the price of one currency in terms of another, e.g. £1 = €1.18
Exchange rates are an important economic influence for businesses that import raw materials and components, and for businesses that export their products
The Central Bank of a country controls the exchange rate system (e.g. fixed or floating) that is used in determining the value of a nation’s currency

The value of a currency changes over time
- When global demand for the currency rises, the currency appreciates
  - Appreciation occurs when the value of a currency rises, e.g. £1 = €1.18 goes to £1 = €1.25
- When global demand for the currency falls, the currency depreciates
  - Depreciation occurs when the value of a currency falls, e.g. £1 = €1.18 goes to £1 = €1.05
Changing currency values can have a significant impact on a business’s costs and sales revenue

The extent to which businesses are affected by currency fluctuations depends upon the volume they are importing or exporting and the countries with which these transactions take place
In general, exporting businesses benefit from currency depreciation, whilst importing businesses benefit from currency appreciation

Change to currency value	The impact on exporting businesses	The impact on importing businesses
Appreciation	Sales are likely to fall as products become more expensive compared to overseas rivals’ Exporting businesses may lower prices and accept lower profit margins	Costs are likely to fall as raw materials from overseas become cheaper The importing business can pass these savings on to customers or achieve higher profit margins
Depreciation	Sales are likely to rise as products become cheaper when compared to overseas competitors	Costs are likely to rise as raw materials from overseas become more expensive Businesses may seek domestic suppliers to reduce costs and maintain profit levels

To help you remember the effects of an appreciating currency, remember the acronym SPICED – Strong Pound Imports Cheaper Exports Dearer.