Exchange rates Flashcards
Exchange rates
The price/value of one currency in terms of another.
- The amount of one currency that has to be given up to purchase another currency.
Appreciation and Depreciation of the value of the pound
Appreciation = SPICED – Strong Pound = Imports Cheap & Exports Dear. E.g. The Pound is Strong and currently worth a lot of Euros.
Depreciation = WPIDEC – Weak Pound = Imports Dear & Exports Cheap E.g. RMB is Weak and thus very cheap for British tourists to go there.
Exchange rates influence on Net trade
When a country’s exchange rate increases relative to another country’s, the price of its goods and services increases. Imports become cheaper. Ultimately, this can decrease that country’s exports and increase imports.
Exchange rates influence on Short-run AS
A weakening in the exchange rate will result in an increase in the price of imports. This will increase the costs of production for all firms within the economy as they have to pay a higher price for any goods/services that they decide to import. This is currently the case in the UK where the strength of the Pound is currently weak. Overall, this will cause a decrease in short run aggregate supply.
- This cost-push inflation can be shown by an inward shift of short-run aggregate supply and it has the effect of dampening the impact of a falling pound on growth.
