Exchange Rates (AQA GCSE Business)

Revision Note

Test yourself
Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

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 floatingthat 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 Tips and Tricks

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

Last updated:

You've read 0 of your 5 free revision notes this week

Sign up now. It’s free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

Did this page help you?

Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.