IGCSEBusinessEdexcelRevision Notes1. Business Activity & Influences on BusinessBusiness & the International EconomyExchange Rates

Exchange Rates (Edexcel IGCSE Business)

Revision Note

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Exchange Rates Defined

  • An exchange rate is the price of one currency in terms of another, e.g. £1 = €1.18

    • International currencies are essentially products that can be bought and sold on the foreign exchange market (forex)
       

  • The Central Bank of a country controls the exchange rate system that is used in determining the value of a nation's currency

  • Exchange rates are an important economic influence for businesses that  import raw materials and components, and for businesses that export their products
     

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

      • Europeans buying goods from the UK now have to pay more in euros than they did previously   

      • This appreciation makes exports from the UK relatively more expensive and imports less expensive

    • 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

      • Europeans buying goods from the UK now pay less in euros than they did previously 

      • This depreciation makes exports to Europe relatively more attractive and imports less attractive

  • Changing currency values can have a big impact on the business costs and sales revenue of MNCs

Exchange Rate Calculations

  • To express one currency in terms of another, use the formula

Value space of space currency space 1 space cross times space Exchange space rate space equals space Value space of space currency space 2

Worked Example

Dublin-based Nana's Upholstery buys fabric for £8,500 from a tartan weaver in Scotland

How much does the fabric cost in euros if the exchange rate is £1 = €1.18?

Step 1: Multiply the cost in £ by the exchange rate

begin mathsize 16px style equals space £ 8 comma 500 space cross times space 1.18 equals space 10 comma 030 end style     (1)

 

Step 2: Express the outcome in €

equals space € 10 comma 030        (1)

Examiner Tips and Tricks

If you'd been asked to calculate the value in £ from the value in € in the worked example above, you could simply reverse the formula

€10,300 expressed in £ would therefore be calculated using the formula

begin mathsize 16px style fraction numerator Value space of space currency space 2 over denominator Exchange space rate end fraction space equals space Value space of space currency space 1 end style

So € 10,000 ÷ 1.18 = £8,500

How Changes to Exchange Rates Affect Importers & Exporters

  • The extent to which businesses are affected by currency fluctuations will depend upon the volume they are importing or exporting and the countries with which these transactions take place
     

  • 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

An increase in the value of the £ against other currencies

  • Sales are likely to fall as products become more expensive when compared to overseas competitors

  • In order to remain competitive, exporting businesses may need to lower prices and accept lower profit margins

  • Costs are likely to fall as raw materials from overseas become cheaper

Depreciation

A decrease in the value of the £ against other currencies

  • 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

  • Many businesses are affected as both importers of raw materials and exporters of goods/services overseas

    • Exporters would not necessarily celebrate a weak pound or be entirely dismayed at a strong pound, as the global nature of business means that for many firms, both costs and revenues are affected by exchange rate movements

Examiner Tips and Tricks

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

    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.