economic influences - exchange rates

Question 1

what are exchange rates?

Answer 1

• the value of one currency for the purpose of conversion to another.
• value changes based on demand and supply

Question 2

what do exchange rates have an effect on?

Answer 2

–	Cost of exported goods 
–  UK goods sold abroad
– Cost of imported goods
- Foreign goods sold in the UK
- Raw materials needed for production

Question 3

SPICED for exchange rates

Answer 3

Strong 
Pound 
Imports 
Cheaper 
Exports 
Dearer

Question 4

what does appreciation and depreciation in exchange rates mean?

Answer 4

• Appreciation (stronger) – domestic currency buys more foreign currency
– E.g. £1=$1.5 is now £1=$1.6

• Depreciation (weaker) – domestic currency buys less foreign currency
– E.g. £1=$1.5 is now £1=$1.3

Question 5

what are the methods to avoid uncertainty?

Answer 5

• Fixing interest rates on long term loans – costs (there may be a fee) but gives certainty
• Hedging – agreeing a price to buy things in the future, now

– Estimate what the price may be, e.g. cost of oil for fuel (airlines do this)

– Estimate what the exchange rate might be (importers/exporters do this)

Question 6

exchange rate apperciates

Answer 6

• exchnage rate apperciates = price of imports decrease
• by more materials for less
• exports = price of product abroad will increase = fall in demand = depends on price elasticity of demand

Question 7

exchange rate depreciates

Answer 7

• exchange rate depreciates = imports will increase
• imports = expensive for the same amount = raise prices
• exports = price abroad will decrease = increase in demand