Exchange Rates (AQA GCSE Business)

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

Appreciation and Depreciation of Exchange Rates

• 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

How Exchange Rate Changes Affect Business

• 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

The Impact on Business of Currency Appreciation & Depreciation