The Impact of Exchange rate Changes (Cambridge (CIE) O Level Business Studies)

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

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