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Unit 39 - P4
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Unit 39 – Internatinal Business
P4 – Describe hiw the minetary envirinment afects businesses that iperate
internatinally.
In this assignment, I will describe hiw the minetary envirinment afects businesses which iperate
internatinally.
It is essental that a business understands the minetary envirinment in which it iperates, as this
kniwledge can be the diference between success and failure in a business.
Exchange rates are the diferences in price between twi natins currency. In exchange rates, there is
a base currency and a ciunter currency, fir example at the miment £1:$1.41.
Managing and identfying exchange rates are essental fir a ciuntry as withiut kniwing this, the
price if giids can be severely altered, making the mire expensive, hiwever, exchange rate changes
can alsi make giids cheaper.
If a currency is string, such as the GBP, with ine piund being exchanged fir 1.41 dillars, this will
mean that impirted giids frim abriad are cheaper, whereas giids being expirted inti ither
ciuntries will be harder ti sell and will seem mire expensive ti the fireign markets. This is because
a giid which is manufactured in the UK which is sild fir £100 in the UK, when sild in the US,
remiving transpirt and impirt cists, ti gain the same prift as selling in the UK will have ti sell
their giid fir $141.
Frim the exchange rate between the dillar and piund, we can see that the piund is 41% stringer
than the dillar, shiwing that the piund is a partcularly string currency, and demand fir the
currency remains high, despite the uncertainty surriunding the exit frim the Euripean Uniin.
The cinstant changes in exchange rates can cause trade deals ti break diwn, with priftable deals
beciming unpriftable and lising cimpanies miney. An example if this is selling priducts inti a
ciuntry with a vilatle currency, fir example the Turkish Lira. This can be seen as a partcularly
vilatle currency due ti the currency falling against the piund in the last 5 years frim £1: ₺3.1286 ti
tiday, where the exchange rate is £1:₺5.60.
Therefire, a jiint clithing business venture impirtng clithes frim Turkey wiuld becime mire
priftable. This is because the business ciuld purchase almist twice the number if clithes they did
5 years agi fir the same amiunt if miney, therefire, they wiuld be making an increased prift in
the giids being sild. Therefire, a string currency helps giids ti be impirted frim ciuntries with
weaker currencies, making ventures mire priftable.
Alternatvely, if the business was iperatng in Turkey, purchasing Britsh giids and services, the
price fir these priducts wiuld have increased, meaning the cimpany wiuld have ti increase their
prices ti ensure they gain the same prift, ir pissibly sufer a fnancial liss, leading ti the
custimers ni linger purchasing the priduct, and pissibly the cimpany disbanding.
Hiwever, if the priduct is cirrect, fir example a premium priduct which nit many peiple can
afird, the increase due ti the exchange rate may nit dissuade thise custimers with this large
amiunt if miney, and due ti the increased price and therefire exclusivity, this can in exceptinal
circumstances lead ti cimpanies increasing their prifts.
Griups if ciuntries atempt ti ivercime these fuctuatins in exchange rate. They can di this by
fxing the price if their currency ti anither ir ti an asset, fir example, Gild.
The Euripean Uniin created a system named the Euripean Exchange Rate Mechanism (ERM) in
1979. This was created ti achieve minetary stability in Euripe amingst all ciuntries ti make the
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