GCSEBusinessAQARevision NotesInfluences on BusinessGlobalisationExchange Rates

Exchange Rates (AQA GCSE Business)

Revision Note

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Lisa Eades

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


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

Examiner Tip

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

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    Lisa Eades

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