Exchange Rates (CH 16) Flashcards
Define exchange rates
Weight of one currency compared to another
Define Depreciation
When value of a currency falls relative to another currency in a floating exchange rate system
Define Appreciation
When value of one currency increased
e.g Each pound buys more dollars
Define Floating exchange rate
Value of exchange rate in a floating system is determined by forces of Supply / Demand
Define Fixed exchange rate
Value determined by the government compared to other currencies
Effect of Pound depreciation on the UK and firms
UK exports become more price competitive. Firms reduce price of good in export market to increase sales or keep same price to increase their profit margins
Effect of price inelastic UK goods when pound is depreciating on export markets and firms
Doesn’t increase sales in export markets significantly as it depends on economic growth in export markets.
High level of firm/consumer confidence and more disposable income they have, the more likely they are too purchase UK exports
Effect of depreciation of pound on firms which are net importers of raw materials
Cost of production increases as imports are more expensive when pound is weaker.
It also makes firms less internationally competitive meaning less profit
Define Effective exchange rate (EER)
Strength of one currency to a basket of other currencies using an index
