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EXCHANGE RATES The value of one currency expressed in terms of another currency.
Exchange rates vary due to the balance of supply (the bank of England can decided how many
notes and coins to make) (COINS-royal mint and NOTES- random brown factories) and demand for
each individual currency.
To strengthen the pound the bank of England print less money- Quantitative easing.
Appreciation – the pound gets stronger and UK businesses can buy more of another currency of
other countries. This also means that the prices of the goods/services abroad are more expensive
than in the UK. This can reduce demands and makes it more difficult to compete.
Depreciation – the pound gets weaker and UK businesses can only buy less of another currency of
other countries. This also means that the prices of the goods/services abroad are less expensive
than in the UK. This can led to an increase in demand and increase in sales.
Exchange rates are affected by the demand for and the supply of currencies:
DEMAND COMES FROM 3 MAIN SOURCES:
EXPORTING:
Many businesses operate globally – this means selling to customers abroad, but businesses
cannot sell to them in UK £, they have to price the goods/service based on what the
currency is in the market that they are active in.
Once the business receives this foreign money, they must exchange it back into UK
£ as profits.
As the exchange rate fluctuates this affects how much profit the business will earn
from the foreign trade.
Also works for UK exports – customers may buy from foreign businesses, these
customers would demand that the goods/services were sold in pounds.
INVESTMENTS:
Foreign investors want pounds in order to invest into UK businesses, this increases the demand for
the pound, which in turn makes the price or value of the pound increase – The pound gets stronger.
(In foreign direct investment)
SAVING:
Another reason why they occur is because if interest rates increase in the UK foreign investors will
look to save their money in banks in the UK as it becomes attractive, so they need to exchange
their currency into £, increasing the demand of the £, ( the value of the £ increases and the £
becomes more powerful)
SUPPLY COMES FROM:
IMPORTING:
Many businesses tend to buy supplies/stock from abroad – foreign suppliers will want the money in
their currency.
They will have to exchange £ into that currency.
As exchange rates fluctuate this affects how much £ they will need to be able to pay their
foreign suppliers.
UK imports increase the supply of pounds.
Strong Businesses will be happy (as of appreciation) with Import being cheap as they can buy the
Pound stock they need at a cheaper price, compared to buying it in the UK. Customers in the UK will
be happy with this, as buying products/services from abroad is cheaper than buying from in
Import
the UK.
Cheap
Export Businesses will not be happy with export being expensive as the cost of the products abroad
Dear will be more expensive, customers (also not happy) are less likely to be attracted to this.
Demand drops for the product/service (depending on if product/service has price elastic or
Weak inelastic demand) Making it harder to compete within that foreign market.
Pound Businesses will not be happy (as of depreciation) with Import being expensive as they have to
buy the stock they need at a higher price, compared to buying it in the UK. Customers in the
Imports
UK will not be happy with this, as buying products/services from abroad is more expensive
Dear than buying from in the UK.
Exports
Cheap Businesses will be happy with export being cheaper as the cost of the products abroad will be
less expensive, customers (also happy) are more likely to be attracted to this. Demand
increases for the product/service. Making the business more competitive within that foreign
market.
Businesses that are affected more by exchange rates – those who sell luxury goods/ aim for
niche marketing/ use overseas selling heavily aboard through exporting and importing.
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